so let's start, you touched on a lot that i want to dive into, i but let's start with the issue of the market and the recovery. >> sure. >> the recovery is not bumping along the bottom, it's starting to pick up maybe here, but housing remains, clearly, the dangerous drag. >> >> yeah. >> how bad is the market, and how much is it holding back recovery? >> um, i was able to come up with a couple of slides that i think show, shed some light on that. i think the answer to your question is that while the housing market was -- the bubble and the ensuing bust and the market itself was, obviously, a key factor leading us into a very deep and lengthy recession, at point house -- at this point housing is not bringing the macro economy down, but neither is it lifting it up. if you look at this slide, and,

yeah, okay. you guys can -- i see it here. yeah, there's screens over there. if you look at this slide -- i'm color blind, but i think it's the red line. this is housing's contribution to the growth in gdp. and you can see that huge gap as housing investment tanked, became a huge negative, led the economy into recession. and the blue line, the other line is gdp growth, and you can see how deep that was. but as jim pointed out, gdp's now been growing for about six quarters at an average rate of 3%. employment which, of course, was a huge negative in the private sector has now been growing for 12 months, 1.5 million jobs. and what you can see is housing, the contribution of housing to gdp growth in this slide is about zero. so it went from being a huge negative to being a zero.

now, if you look back on the earlier numbers in the expansion of the 2000s, you see it was an important contributor. so certainly housing investment is not contributing to economic growth, and often coming out of a deep recession that's precisely what you want to see. you want to see that contribution, and we're not seeing that. so i'm not saying that it's, that we're out of the woods and everything's all better, but i am saying what was a negative in this case is more of a zero. one more slide on this, and then i'll get to your next question. one of the reasons that's true is actually an interesting point that is somewhat underappreciated. this slide shows residential investment, so that same factor we were looking at in the last slide in its contribution to gdp. .. finish

>> gdp is one metric but it's the job as a metric because voters judge the president on. there may be housing impacts on the job market that are too showing up in gdp, for example, a lack of mobility for people if they can't get out of their homes, have problems not being able to create new construction jobs. how much are you worried about this sort of employment effects right now? >> i worry about everything everyday, so people ask how much i worry about stuff like this, the answer is a lot. because unemployment is way too high and job growth while

positive, is too slow. there's a lot of feedback in the dynamic relationship you just described. it's obviously a lot harder for people to service their mortgage debt if their employment situation is less secure, if their wages are not rising in face. and particularly of course if they are unemployed. in fact, part of our modification program targets the unemployed and the long-term unemployed in particular. so i think there's feedback both ways. i just happen to have another slide on the. this is from a bureau of labor statistics paper that just kind of looked at all the different jobs associated with employment -- i'm sorry, associate with real estate including construction but also including financing and real estate. and you can see, not only just a

huge loss there through the fourth quarter, i think these are quarterly numbers. fourth quarter of 2010, but you also see a you are talking about seven, 8 million jobs. this is out of a private sector job market of 110 million jobs or so. this is a big sector. it definitely weighs on our concerns. that's one of the reasons why you are happy to see the talks in getting out of the system and correction is well underway. the fact that you're bumping along the bottom more than your increasing and contributing is still problematic. at the same time we do have a consistent trend up in private sector employment. that's a positive. but when you make your list with the things you worry about, today's economy, state and local budget cuts obviously, things that are going on in other parts of the globe, the housing market is on the list speak up when you talk about housing market and unemployment and how they are related, one of the problems is you don't have a job, you can't pay your mortgage.

the foreclosure property is holding back the clearing of the market. as we look at that, are you doing enough to attack the root of all that which is the employment problem? have the present and have your policies done enough? >> i think so. let me start with another picture just because i think it's interesting and links up directly to what you're talking about. this plot foreclosures against private sector employment, both are indexed to a hundred and 2007. i can see and i can't see colors but otherwise i'm fine. [laughter] and what you can see here is, this is well known, but certainly the decline in employment was arrested starting back in january of 2009. we began to see more consistent

-- january 2010 we start to see more consistent employment growth. while foreclosures kept tracking of. as i mentioned 1.5 million jobs over the past 12 months. that's not enough. the unemployment rate at 8.5% is way too high, but it's come down considerably over the last few months. i would argue that the president agenda, one that is probably very important to our office as well as the vice president, has been integral to offsetting some, not all, offsetting some of the damage of the greatest recession of our lifetimes. in particular the job market, we were losing 750,000 jobs a month when we came into office. and if you look at come if you simply plot out the trajectory in jobs, against policies that

were targeting those problems you actually can see some good traction. i understand that the recovery act has taken a lot of negatives in the media, you know, in various analyses, but i have no doubt that that stimulus accomplished what it set out to do. including the saving are creating a three and a half million jobs, which is by no means a trivial a congressman, and very much in tandem with help by the federal reserve and housing problems we can talk about, part of this problem. but i think what you have to realize is that the recession that greeted us and i described in my opening comments was far greater in any conceivable stimulus or housing relief program could fully offset. have our measures are rest of the downfall and create the

conditions for growth and the private sector economy? absolutely. you can see some of that happening. but the damage was immense, and it's taken time to correct? >> one of the critiques was you put in place things like the homebuyer tax credit which is now expired. is that they have in cushioning the blow may postpone a little bit the clearing of the market. how fair is that criticism? >> i don't think -- there's something to the budget i don't think that's a fair critique. if you think that a reasonable policy for an administration in the midst of the greatest recession since the great depression that had at its root a housing bubble inflated by a

financial mess, if you think that the policy solution to that was to just kind of, what was the name of the guy that created the construction guy? if you think this was a moment for schumpeter to liquidate, liquidate, liquidate, i guess that's over. who for schumpeter. i think that's completely wrong. i think to have done that would have squandered hugely valuable resources, not least of which in terms of output and jobs, but also in terms of people's homes. but i think it has to be a balance. if you go into this thinking, if you go into your policies thinking that every single potential foreclosure must be stopped, then absolutely you will prevent the market from carving out a bottom. but if you implement a set of

policies that are targeted to the middle class or trying to figure out who are the people that with a loan modification can get out of this very deep and unfortunate bubble, and must situation, you try to give them the time to get back on their feet so that they can sustain their mortgages, and i think you are ultimately creating a floor on the housing market and the economy that is critically important keeping things are getting a whole lot worse than they got speak are like to get back to our poll. 46% of americans say they support what the government is doing to promote homeownership. 46% say the policy go too far and cost too much. simple question, which side is the administration on? >> i actually think that we

answer that question in our white paper that we did on gse reforms. and what we said is that there is a role for government in the housing market. we come up at the end of the paper with three options, a very targeted role to the low or moderate end of the market through the federal housing administration, that plus a backstop in case of an emergency. and a somewhat larger role involving reinsurance and backstop, broader backstop of the market. those are three options are so in answer to question, every one of those options have some role for government. but the theme throughout the paper and particularly targeting fannie and freddie and the absolute necessity to wind down the gses is that governments role in the housing market was

part of the problem. and got way out of hand, and that needs to be corrected. now, in our view one of the most important parts of that correction, putting that roll back into its proper size in perspective is the winding down of the gses. that's going to take some time because as i mentioned in my comments, it's the gses and the fha, the veterans, all the different housing policies are supporting over 90% of current loans because private market has just been on the side for a while now. that's going to start come back. as that comes back we have to pull it down. so, i think it's actually very instructive that the poll shows it is sort of a half and half thing because i both right.

there is a role for government that's got to be one that supports sustainable homeownership, not the kind we had. i will say one thing about this, that may be a somewhat underappreciated. the role for the government in the housing market is by no means simply housing policy at hud. it has a lot to do with financial markets oversight. and if you just get to the very bottom of this thing, certainly one of the primary causes was just terrible underwriting and was the securitization, securitization phenomenon that lacked transparency, that lack any kind of responsible risk retention. and these kinds of policies are very much embodied in dodd-frank financial reform. so, when you're thinking about housing policy, you have to think about housing finance, of course, and without proper

oversight. when you hear tim geithner talk about this, every to progress he talks about making sure banks have adequate capital to support their liability. that didn't happen in the financial bust. and so that's a key part of this, too. >> let's drill down on that just a second. dodd-frank. where the critiques of dodd-frank is it's going to make it too hard for people who would otherwise be good borrowers to get alone, and is going to make it too hard for home builders to get credit. could these regulations be too onerous for the fact that credit is needed to move the market? >> it's always a balancing act, and i guess what i look at it, my gut reaction would be no. next question? no. [laughter] >> we have some more. >> know, i think that, thinking about, to me the most meaningful

economic analysis of what happened, got us into this mess was the underpricing a brisk. and yes, i am a more left-leaning progressive economist, but i still believe, and always will, when you screw up prices all hell breaks loose. and if you screw up the price of risk, you're asking for it. and we asked for. by we i don't just mean by any stretch of imagination the public sector or the gses. this was initially a very much, i risked underpricing that you would see all throughout the private sector financial markets. so, it's absolutely appropriate that financial regulations does the kind of things i mentioned in my last answer that has risk retention in securitization, that has a larger capital backstop supporting the

liabilities that banks and lenders hold on the balance sheet. that has consumer protection, that has a financial oversight board. all of that is critically important. and, in fact, i would probably twist your question around and say we obviously, policy went way too far in the other direction in terms of deregulation and lack of oversight. and all based as i said in my comments, you know, all backed up by a very i think toxic economic philosophy that argued there's no need to regulate because markets will self correct. the mechanisms to perform the kind of oversight that has been, that dodd-frank as in it are not needed because they're built into the system. well, no, they are not. such oversight is very much needed. there's an interesting set of work by a great economist who came back into vogue during this because he thought exactly about this problem and he talked about, people talk about the

minsky moment where the economy, where economic players, particularly financial markets go from being heavily risk, hugely underpriced risk to overpricing risk. they become hugely risk of birth. there is some in that, but, frankly, i see much more than just as he deleveraging. one more slight and then, i think this is a really underappreciated picture i'm about to show you. maybe i'm not. this is a simple, you can get this with two mouse clicks if you go to your friendly federal reserve board website, but it's really an important picture that hasn't been touted enough. this is household debt service as a share of disposable income. it's the debt service ratio. but this is it takes all the money that people are spending, to service their debt, and divide that by all the disposal income in a comic. if this goes way up you tend to

think people are highly leveraged and as it starts to come down, you can see a very big sliding down the leveraged scale. a lot of that deleveraging is true. my deputy always makes this point. a lot of that deleveraging is right off, charge-off, foreclosures. this isn't pristine for every paying off their debt the way you want them to. but that's part of the deleveraging as well. what you see there is the debt service ratio is well back to its pre-recessionary levels. that suggest that you're back in a situation where the deleveraging cycle is working itself out. that's good for the economy speak on so glad you brought up risk. the moral hazards that remain in our economy, there's a large school of thought process along as the government guarantees some or all of the housing market, expletive delete or even implicitly with guarantees for the banks, to put up mortgages,

that will always engender too much risk in the market. could that be the case? even after this crash and we stability of the possibly of another housing bubble that could tank the economy? >> people who take the long view, robert shiller wrote an article about that very question in "the new york times," it was very good, a few weeks ago. and i commend it to you. he probably is the most scholarly person in terms of the long view of that kind of question, and he said this is kind of a hundred years thing, and he doesn't think it's going to happen again soon. from my perspective as a government economist we can operate based on -- we can't operate based on the. we have to set up the policy architecture such that risk is a programming balanced. so we can't really go too far one way or the other. and i think that's very much the

spirit of president obama's view on it, that moral hazard is something that very much has to instruct the way we set policies up, like a loan modification. he have to try to target people who need help and not target people who don't, or people who will not be able to pay their loans off, even without. so you always have to be cognizant of moral hazard. but the thing i could say, so i would say i think we have to balance right, but the thing i would say to those who argue, you are creating by any kind of a government backstop, whether its option one in a white paper which is for the low and moderate end of the bargain, at any government backstop will engender another bubble and bust. those people have to swear themselves to the question of do you really believe that the government, i'm not talking about our administration, i'm talking about administrations in years, let's hope robert shiller

is right and we are not activist for many, many decades. but if you think th the governmt is in place at the time it's ever going to sit on the sidelines and let things crashed. there's just no economy that's ever done it. if you believe that then there's always -- i think it has to be considered. >> you mentioned the foreclosure modification. it's a program that is just not gone up to expectations. the handbag program. what is wrong and is there anything you can do to fix it? >> is a program that i would argue is working a lot better now than when it started. but the fundamental core of your question is of course valid and important to us. but i think -- and i'll try to speak to that. we are always thinking about how to make, you know, our programs,

particularly these, work better and we have some thoughts. but i think that to some extent the hamp program hasn't undeservedly at rap at this point in time. you are absolutely right regarding expectations and numbers of mods that we thought would be permanent now. and i can speak a little bit too wide those expectations haven't met. but let's just talk about some facts that are worth considering. you know, more than 600,000 permanent modifications have begun since the program has been put in place, and there's about another 25-30,000 signing on every month. and at this point, nearly about one and a half million homeowners have entered trial mods since the program began. one of the statistics that i find really important about the program is that the median

annual income of people have been helped by hamp is about 50,000, which is about the medium household income. and the median mortgage is about 230,000 which is around the median home price. so this is a program that is targeting the middle class as executive director of the task force i find it important. by the way, the median monthly savings for the 600,000 people and a prominent mods are 540 bucks a month. you know, that's real money. and so that's really making a difference. hamp has also changed and it's improved the way mortgage market the drug industry. the middle class task force we looked into this, and so one of the things that's is people are coming in, are applying for hamp and find themselves in proprietary mods that are being offered by banks and servicers

so that 6000 is a little depressed artificially by that, by that point. one of the things we did with the middle class task force which i think, folks might want to go take a look at is, we worked with the department of justice and hud to look at modification programs, counseling programs, ways that homeowners could find helpful of the country. we published a document for the best practices and that is something i would encourage people if they're interested in this. in terms of making the brogue ramp work better, we've adjusted it along the way. i think one reason it hasn't met the expectations educrats pointed out haven't met, has to do with this balance and the moral hazard problem i mentioned earlier. we felt we couldn't build a credit box, and eligibility box that let in quote to many folks, folks that i couldn't pass what

we call, what the industry calls a net presence, a net positive present value test. that is come you want to make sure you are helping people who can with help ultimately pay the loan, and not throwing good money after bad. so lets face it, there are people got into loans that they said they can't sustain it and all you're doing if you offer them a modification in sustaining the inevitable that costs the taxpayer. but we make sure that the hamp program did not apply to the jumbos above 730,000. so we wanted to target the middle class which is the numbers would have. this doesn't apply to vacation homes or vacant residences. so we felt given this problem of trying to reach the right people we have to draw a box around it. i think there have been problems with documentation, with some of the servicing. and we are working on ideas to improve that. there's a task force now with 11 different agencies.

there is of course the settlement discussions under way. i'm not going to speak to those, but that's a project of the state attorneys general working with the department of justice. so i think with a greater attention to ways in which servicers can make sure that they are thoroughly evaluating people from modifications, we can do better. but i think you still have to tread that balance between doing as best we can, trying to get the numbers that were ambitious, no question about it, but without providing modifications to folks who either don't need them or ultimately will not be helped by the. >> act to the middle class. back to our heartland monitor poll. it's interesting to see just how much americans associate homeownership with a middle class. they associate more with the middle class and knowing to college, vacuuming wealth, and even having a secure retirement sort of a head of them come a

comfortable retirement. so, clearly this is in the american psyche a really big deal. but i wonder, is it a symptom of the middle class or is it a driver? should we be trying to push people into middle-class, should we be promoting homeownership osha would be doing things to address the income stagnation of the middle class, other areas and allow homeownership to go without? >> it's a real important question and i like the way you put it. i think we should come as i said in my opening comments, you know, and i think this comes very strongly out of the supplements, you know, i really believe that homeownership is part of the american dream for a lot of people. and i think you have to start from that place. but it's got to be sustainable. that dream can become a nightmare if it becomes unsustainable. and i mentioned both private and public were essentially doing too much to significantly

underprice the risk of housing finance. and that creates as much a slight out of the middle class as a ladder into it, as mike colleague likes to say. i think there's a role and i talk a lot about the rule should be. our white paper offers a set of options. i think what i try to do is talk about a balanced role. but usually something into question that hasn't been discussed enough, and i have a slide on it, which is a connection between actual middle-class living standards, the ability of the middle class family get ahead as they work harder, as they contribute to the nation's productivity growth, and their ability to

climb into the middle class and stay there. part of that for many people is going to be owning a home. we haven't talked much about renting which we stress in our white paper is also an abort and a viable option. and in everywhere policy needs more help i think. but stick with your question for me and let's stick on this point. is probably one of the more fundamental points of my personal view on this as someone who has paid a lot of attention to middle class well being over my career as an economist. what you see there is again, i think it's the blue line, is the bottom line, it's a real median family income, which rises throughout the '90s at a pretty good clip and is completely flat in the 2000. now, the 2000, the business cycle expansion of the 2000s was the first expansion in history of these data going back to the mid 1940s where the middle class median family income ended that expansion no higher than when it started. poverty rates were higher at the

end of the 2000 expansion than they were at the beginning. at household and family meeting income were about the same or maybe even lower in real terms. but this was a period of strong productivity growth, and yet because of any quality that growth found, that growth did an end run around the middle-class, and yet what you see there in the big gap between median family income and homeownership rates under the other line in the graph, you see homeownership rates climbing steeply throughout this period. completely despite the fact that median family income was flat. the homeownership, i'm not saying this is for middle-class people but certainly they are germane to the sister states and the question. look at that big gap between family income and homeownership rates over this period that developed because one was going up and the other was flat. and, of course, what fill that gap was credit.

credit was the financial fascinations, and bus that i've been talking about throughout my comment. in order for the middle-class to sustain homeownership, two things have to happen. one is risk has to be accurately priced to financial markets. and i talked about that, and i think risk retention, securitization rules. i've talked about banks holding adequate capital. there's the whole financial side of discussion, much better underwriting. but we also have to crack this nut that's been i think a very tough one for the middle-class for decades now, which is ensuring that the benefits of a growing economy actually flow to a large group of people who are helping to create that growth, and that's the middle-class. and as long as that wages in there, you're going to have i think the real problem of folks improving their living standards

through, you know, financial credit, through borrowing, through ways that don't connect, good old-fashioned productivity income growth which was of course key to this economy and the growth of the middle-class and the postwar decade. >> youth with good enough of my question. were going to throw it open to the audience now. there's a microphone over there and over there. if you just want to line up by the microphones and then we'll take your questions. and bonus points for anyone who can get jeered to show one of his remaining slides. spiegel it's not hard to get me to show slides. i'm easy. [inaudible] >> i don't don't think the microphone is on. >> i can't say how may times these microphones are not turned on in these kinds of settings. i don't get it.

[inaudible] >> i read it. >> middle-class family are always trying to get their kids into the next best school districts. can we really fix the housing problem if we don't fix -- >> that's a great question. and it's a succinct one, also. if you look at -- we are very much aware of that problem, and if you look at our white paper, which i commend to you. if you're interested in this discussion, at least in our administration's view on it, please read the white paper by treasury and had. i think one of the first sentences in the introduction says something to the effect of we need to have a housing system, a housing finance system that enables people to find

affordable housing near good schools. so it is elizabeth is absolutely right, and it makes a ton of sense to approach that from the education side. it's a different seminal and one under the "national journal" is fully capable of having, i think you'd be hard-pressed to find an administration that has tried to do more to improve exactly that problem. arne duncan lives and breathes that question, as president obama. i think the premise that if you could take a bad school and turn it into a good school, housing next door goes from being lousy to better. it's not the only part of the equation but it's a critical piece. the only thing i'll say is that, remember, the federal government's footprint in local education is not huge.

it's -- we can make a difference and we are trying to, but what i would encourage you and anyone else who's interested in the question take very, very cicely right now is what's going on at the state and local level. we can have these great discussions and nice conference room here about imports of local education while out there in gaza locality, you have folks lashing and burning. not in every case because they want to. in fact, if you're a governor or a mayor, you know that's where the rubber meets the road. i'm sure they would rather not in lots of cases. but, frankly, that problem is intimately related to state fiscal issues. something by the way we try to help a lot with in the recovery act. 350,000 educators and educational personnel had jobs that were preserved thanks to

the recovery act. we were very much aware of that problem, but it is worrisome. >> we're going to go to decide now. >> hi. there is anonymity among hispanics and african-american organizations in concerns of folks on the right seem to be pressing cra as a cause for a lot of our housing market woes, and that they seem to be feeling equal pressure on left when the administration's papers seemingly pushed less homeownership and higher cost of, and higher costs for home purchasing. which detracts from their view that homeownership is a way for minority communities to build networks and assets. where do -- what is the hope for minority stakeholders in this fight? a french model that has less ownership and has -- like the

administered and pushes, or is there hope to try to preserve government involvement as it exists and not chuck it away? >> great question, and tried to be a little break so we can get more questions in your. i don't think there's much of an argument for the cra as a causal factor. there's been a lot of argumentation trying to suggest that the housing bust and the ensuing recession was for the fall of government programs that supported low income housing and the evidence for that is extremely unpersuasive. so just, you know, get that out. every one of our options in our white paper has a solid role for federal housing administration in the low and moderate cost housing space. as you heard in my comments,

when i say risk was underpriced, i mean it. and if the price of homeownership, not across the board, and obviously there are special, special considerations for lower income folks and as with the fha comes in. if the price of the mortgages, if the price of financing the mortgage coast of x. basis points in a new policy agenda, you may recognize that as very consistent with my concerned about underpricing risk and with a set of reforms that certainly have a potential to change that. i guess i would argue that, like i think is implicit in your question, homeownership sustainable homeownership is in the key source of net worth for folks trying to make into the

middle-class, and that's obviously the place -- the case for my as well. we have to be mindful of rental operation. one of things that fannie and freddie did pretty well over the tenure was to provide liquidity to rental markets took and it's something in our white paper we talk about as an important role for hud and for fha to try to think about going forward. you know, half of the renters pay more than a third of their income on rent. wait, maybe -- i think maybe -- anyway, there's a large share, we mentioned this in the white paper, and large share of renters who pay well over a third of their income on rent. we introduce some ideas that perhaps there could be some sort of risk sharing between the private sector and the fha degrade more liquidity in rental markets. you know, the private sector financing of rent tends to be

very much focused on the high end and not nearly enough on the low end. so i think both of those, both commitment to the private, commitment to homeownership through the fha and doing a better job of financing rental options at the low end would be how i would describe our goals speaker we have time for one more question. >> i look at report, and i hope i got it right, it was saying that 20 to 30 somethings are the population, there's a lot less of the 45 to 50 somethings. back in the late '90s, early 2000 we were told to upgrade our homes and to get larger homes. so when the 45-50, 15 years or so from there looking to retire and downgrade, is the government looking at what's going to happen in 15, 20 years from now when there's going to be more

supply than demand? >> definitely. by the way, i did have that right, half of all renters spend more than a third of their income on housing. very much so, serve. one of the things of course are looking at right now is a large inventory overhang. while as someone who's both mindful of the current economy and the future economy, will look at a housing starts report like the one we just got with big negatives as problematic in the sense of gdp growth likely earlier flight or it also does show and you can see this in numbers that we are cutting through that inventory overhang. so, supply and demand, 15 years out is going to be much more of a demographic phenomenon that it is a bubble phenomenon, like we're dealing with now.

i think the problem that we -- historically, we've had tremendous -- the kind of dynamic you're describing hasn't been a huge problem in america because we had very liquid housing. we've had with securitization, which i think you mentioned, or somebody mentioned, obviously we do much more securitization than they do in europe. covered bonds, which are an interesting and a very useful and common source of funding in europe, much less so here. is a narrower piece of housing finance and a large securitization, the very liquid market that we have had here. and so folks have been okay in terms of the kinds of demographic dynamics you mentioned. i would argue that the problem is less one of demographics and supply and demand, and more want of that slide i should show the him come growth of the

middle-class. assuming weekend and we're really going to try to get this right, the pricing right whether it's a guarantee, whether it's financial regulations that operate through financial channels in the housing finance markets, assuming we get the price right of mortgage borrowing, you've got to get, you've got to get folks income, you've got of middle-class folks income not necessary going in lockstep with productivity but much more like the picture showed in the '90s that showed in the 2000s, growing at base. and if we can get an economy coming into place with income is working the way it should in that regard, then i think that's going to be okay. it's a 10, 15 year forecast. you always have to take such things with a grain of salt. what makes me out of -- optimistic about that is the market has historically dealt with inventory overhang's just the way it is dealing with it now. and i think the bubble part of

this problem is going to be, is going to be gone well before them. >> i want to thank you all so much. jared, thank you. that was great. i just want to see if anyone wants to see the rest of your slides i'm sure he would be happy to bring it over to his house. bring your own writing bill. give a round of applause for jared bernstein. [applause] [applause] [inaudible conversations] [inaudible conversations] >> now we turn to our next video portion. for the past two years they all said "national journal" heartland monitor poll has given a voice to american economic

anxiety and americans future expectation. this video gives those voices of face showing real americans expressing real concerns. it profiles 35 people from all walks of life who make it clear that they have made homeownership and overarching and bedrock part of their vision of the american dream. please take a look. if anyone wants to see the rest of the biggest industries you can check them out at stories of the heartland.com.

>> i have owned a home for 15 years. >> i omaha and. >> i am a renter. >> i have a house. >> i am a rented. 42 and a half years. >> i do own a home, unfortunate the value on my home has decreased. >> i lost my job. there's no way i could get the price that i paid. >> everything is cheap. >> it would be great buying a house. >> i think the $8000 credit that the government gave last is a good idea. >> it's good and bad because you want to make sure it's the the right people to buy. not the people that are doing it because they have the credit and buying above their means. >> we are right now in the middle of trying to save our house from foreclosure. i was never late before on anything. i mean, credit card bills, nothing. it was between paying the electric bill, making my car payment. do you go to work, keep the

electric on. it was a tossup. i just did know what to pay. i didn't know what to pay. >> i have known a number of people have had problems getting up there mortgage and are in foreclosure. some have lost their house. >> i know a lot of people going through a difficult time right now. i have a friend who stopped paying the mortgage. obviously, they don't want to not pay the mortgage but at the same time the economy is not allowing them to be able to. >> one gentleman said to me, i never thought i would live to be 89 years old and the market dropping. >> it's kind of hard to stay above water. >> i have a relative that experienced foreclosure. just crushing their entire lifestyle. >> there is some shame, they allowed something to do. bailout something that they owed to just go into complete chaos. >> greed is one essential

factor. >> plain old good american greed. >> it is strange that no one got arrested for all the fraud. >> do i think buyers are also responsible? absolute. you have to look at what you are buying and what you're paying and what your interest rate is. people were buying homes out of their price range. >> both the homeowners, the bank, the government, and they think each of those parties responsibility, they have to get out of it. >> i don't want to read for the rest of my life. you want some sort of stability, something to latch onto and say that his mind. i have invested into this town. i've invested into staying somewhere long enough. >> i love to own a home in two years. >> is the typical home that everyone calls the american home. that's what i want. >> owning a house in america is the gulf. >> it will always be the american dream. i think right now it has got

kicked in the stomach. >> i think the future is fairly optimistic. unemployment rates are decreasing. the economy overall is picking up. >> i feel the government has done all he can really do to stabilize markets and encourage lending. >> things have got to get better. my mother always said, first they get worse and then they get better. >> i am positive about our future. that's why we live in america. >> good morning, everybody. i'm and codirector of "national journal" and political director for atlanta media. i probably have other titles that i can't remember them. we have a terrific panel to continue this discussion of

homeownership in america. and let me just quickly introduce, let's see how we are ranged here. sarah rosen wartell, executive vice president, center for american vice president. served under president clinton. jerry hauer is chief executive officer of the national association of home builders and former work with both the national association of realtors and the national association of state housing agencies so he has seen this are many different angles. shanna smith is president of the national fair housing alliance. bravely serve as executive director of the fair housing center of toledo, ohio. and alex pollock, resident fellow at the american enterprise institute, specializes in financial issues, formally served as president and ceo of the federal home loan bank of chicago. last night when we had a dinner that had all of our panelists, as well as some others, it was a rather glittering array of

thinking and analysis about the housing industry. and i said then to paraphrase john f. kennedy, not since bill levitt dined alone had there been so much housing expertise in one place at one time. so we have a strong group for you to kind of kick around these issues. let me start with, you know, what is the basic gap or dichotomy that we are looking at as you see in this poll, and even more eloquently in that video? americans remained attached to homeownership as an ideal in their own lives enormous percentages saying that they prefer it to renting. they would advise a family member to buy a home. 90% said they would buy a home again. of homeowners despite all the turmoil in the market. and yet yesterday the commerce report home owners -- home sales are the lowest going back to

1960. so there's aspiration and then there's execution. what is the space in between? why is this personal desire for homeownership not translate into more actual people showing up in the model and putting a check them? >> i think the thing the chart that jared showed is really the key to the. we had a greater time during which there was a great deal of economic growth, but wages are stagnant and it was driven by credit or with credit, the box is now very much tighter and employment hasn't come back. that is at the income to support, or the confidence about the continuation of income to support that kind of home buying that we need to really boost the economy. >> i would agree that the issue of credit right now is one of the primary drivers. right now the banks have overreacted to the point where

it's impossible for many qualified homebuyers to get any kind of the mortgage anywhere in america. even in the markets around this country. and i want to point out that there is no national housing market. it is a series of local markets. some of which still have housing increasing in value. even in those markets it's impossible to get credit at the consumer and and it's even more impossible to get at the acquisition development and construction and. the second point i would make is that i think that the american consumer over the last couple of years has become very attuned to the fact that what happens in washington will control their pocketbooks more than their own decisions in a lot of ways. and i think right now the talk of the credit problems that are being caused by overreaction here in washington, the inaction on stabilizing the secondary market for home mortgages is taking a toll on the american consumer. and the talk of tax reform and taking away incentives basically undoing, if you will, in these

three areas over 100 years of housing policy in america has people sitting on the sidelines. they are scared. >> i think from a civil rights point of view we look at the access to credit, and both my colleagues talk about credit, that could drill down in that we are looking at higher credit scores being required. we are looking at higher down payments. and people of color have historically been squeezed in a tight credit market. women, fema head of household, people with disabilities are squeezed out of the market. so if we don't have access to credit if we don't have undermined that make sense. jared said that went to an extent that we are in a swing that where i've had lenders say to me, i'd rather make the loan to a couple who is older, who may have a lower credit score, but have a long history of making payments. than to a 29 jeweled couple who have to good jobs higher credit score. so the industry is trying to

figure out who are the going to loan to? and with the stagnant income that sarah discussed, we have to go back and look at what other appropriate loan products. 30 years fixed rate loans are the appropriate products for most people in america. the exotic context, you know, the arms, the option a.r.m.s, no docs, all of those, were products that were creating for a particular economic class. that was very high income who had increasing annual income. those products were pushed out to the middle class and low and moderate income people, which before were sucked into the foreclosure rate that we see. we have to get back to the middle. be sensible about underwriting and make sure that down payments can be under 10%, and do good underwriting. two good underwriting. >> first of all let me say i think the american people are

right to like homeownership in particular, and ownership in general. this isn't ideas with deep historical roots. thomas jefferson wrote in the declaration of independence as we all know, life, liberty and the pursuit of happiness. but the more common phrase, is life, liberty and property in the virginia declaration of rights for example. that property addresses a profound part of our life. they can't be referred to in my mind is a typical economic or financial market gap between the trend and the cycle. we have long-term trends, and an enterprising market economy they tend to be going up on the train, but obviously we cycle around the train. we are in the down part of the cycle. house prices have basically fallen on a national basis, although i agree with jerry's point that national average is going to be perceptive. house prices have fallen back to

their trend. but we're working our way through the bottom of the cycle. and that's why we see some of the tensions that you mentioned. >> now, let's talk about what the trend is or can or should be. in the sense that we have two administration. we had the clinton administration and in the bush administration. they had a conscious goal of driving up the homeownership rate. when clinton came in it was 64% in 1993. i will talk about secretary of henry cisneros in the nicer greece a high of 69% in 2004. since then we have received and will talk about the enemy. to what extent can you talk about products that were initially intended for those at the top being marketed to those much closer to the bottom. to what extent did the effort to expand homeownership as a national goal lead us into the waters, and attribute waters that we found ourselves in the last few years?

and to the extent it did, is it something that should be replicated? is that the train to get back towards 69, 70% of the country owning homes? >> first of all, 69% isn't a particularly high homeownership rate on an international basis. it's in someplace in the middle of the pack of advanced countries. and mid '60s is the middle of the pack number, not bad, but not particularly hi. i would guess that we will continue around that level. the notion that you should increase homeownership by creating excessive debt is an obviously bad nose and. we shouldn't have done it. people borrow, for example, with the extreme case 100% of the cost of the house don't actually own the house. ..

>> getting up into the 60%. we had this little blip, which as we now know reflected excessive credit creation, excessive borrowing, excessive leverage both at the household level and at the financial system level, for example, fannie mae and freddie mac. and we're cycling back out of that. >> sarah, did we go too far? >> i think with the benefit of

history we could say that the goal of home ownership as the only measure of success was probably the wrong one. but the right measure of success was whether there were appropriate housing choices for every american that helped meet their needs. we had people who were going into home ownership because if you had three kids, there weren't decent rental housing options for you, and home ownership made good sense. i also think there's a difference in the two periods that you mentioned, the 1990s and the 2000s. in the 1990s we learned a lot about how to do affordable home ownership right, and we learned there are ways to mitigate risk of low down payments because home ownership is, ultimately, at the end of the day, one of the ways we encourage asset development. we have enormous disparities in our society in wealth and asset ownership between particularly low and modern income and minority families and others, and we need to give people access to home ownership kind of forced savings as one of the

ways that we should be encouraging wealth development. in the 2000s we kind of decided home ownership was good even though it was clear these products were completely irrationally priced. and the fact that it was expanding home ownership made people unwilling to step in and take what were, obviously, reasonable steps. so it's an appropriate goal to make sure access to home ownership is available to people who are ready on sustainable terms. it's not an appropriate goal to say everyone should be homeowners whoever they are at any point. >> the other big difference as jared bernstein alluded to last night was when home ownership rates were rising in the mid '90s, so was the median p -- median income. jerry, some people would argue, basically, there's an upper limit of given where the economy is of the share of people who can really afford and are willing to be responsible homeowners and service their mortgage and so forth and that we simply went out beyond the

boundary. what is your take? >> i think from an economic perspective, clearly, we went beyond the boundary. there were problems that have caused us catastrophic results. but you also have to take into account the fact that housing policy is a combination of social and economic policy, and as my colleagues are pointing out here, i think we do have an obligation with prudent underwriting and intelligent lending practices to get as many people as want to be homeowners who can afford to be homeowners. so i still think that what the bush administration and what the clinton administration tried to do were the right things. i think that we in the industry have to take our fair share of the blame for taking it too far. the goal wasn't too lofty, the execution was bad. >> well, shanna, let's turn this around for a minute. if talking of easing off in efforts to expand home ownership, who are we talking about in terms of not moving into the ranks? a big part of this was, as sarah

suggested, closing the gap between minorities and whites in home ownership. that was kind of a theme, a subtheme of the overall effort over these two administrations. if we're saying that we can't really get back up to those high levels, is that imless sitly saying we're accepting that gap between minority and white home ownership, and should we be accepting that? >> my question was going to be who's that 60%, and what's happened to latinos, african-american, asian-americans, immigrants? those families were buying homes and sustaining the homes. what happened to them in the market was the re-fi pushing and the adjustable rate mortgages and people saying, you know, you can get this lower interest rate. and then as sarah was saying, in the '80s and '90s the community development plans across the country helped build new housing for low and moderate income families, and they were in the home home ownership mark. they were there.

i think that we have an obligation because of the discrimination that happened during this whole process and what interests me is when people, particularly economists, talk about the fall in the market and the foreclosure, those of us in the civil rights movement saw this issue happening in the '90s when the predatory lenders and the people pushing arms went into the senior citizen, black neighborhoods across america, stripped them of their equity. at that point pushed it then in the 2000s and not only stripped the la -- latinos and african-americans, but then the middle class white families. so we have to look at the impact of discrimination, regulation, enforcement of the fair housing laws, fair lending laws so that people of color get to get back into the market. >> well, let's say, i mean, i think everybody agrees, alex put it most pointedly, expanding home ownership simply by

expanding debt did not turn out to be a good strategy. >> right. >> if we want to continue home ownership for those underremitted now, say african-americans and latinos, so forth, what is a more sustainable way to do it? are there strategies that can do that without leading to the overextension and the kind of market disruption that we saw? >> i it's based -- i think it's based on loan products. in the past fannie and freddie created and suggested products to the u.s. department of housing and urban development that had 3%, 5%, 10% down payments. they also had products that they wanted to introduce that the regulators didn't let them that would allow new home buyers to get what would be an insurance. because most of the people are not buying new homes, i'm sorry, because they can't afford them. but they're buying existing homes, and these products would allow for a payment to be made so that every year the systems in the house, the furnace, the air-condition, the roof, all the

major systems would be checked, and if they needed assistance, that insurance would pay for repairs to sustain the house that low and moderate income people could buy. the regulators wouldn't let that go through. so if we're going to increase this, we have to have special loan product programs that people qualify for, make sure they can sustain the monthly payment and to have a payment to sustain the house at the same time. we can do it. we did it in the '80s and 't 't -- '90s. >> alex, should we be trying to increase it? >> sarah talked about an, i'll say old-fashioned mortgage idea. and what we continually discover in finance is the old-fashioned ideas were right and the new ideas turn out to be misleading. sarah talked about forced savings through a mortgage. i'm not so big on forcing people to do things in general or on trying to, you know, guide them or nudge them -- >> nudge, nudge.

that's -- >> i'm not big on that either. but i am big on savings. so let's think about what paying off your mortgage means. this, i think, someplace you and i agree. your mortgage means savings. here's this old-fashioned idea. you get the mortgage, and you pay it off over time. little by little. and you don't think about continuingly releveraging the property. and, therefore, never building up the equity. so i would say one of the biggest things we could do that would be helpful throughout the society is a reemphasis on the savings part of housing finance which is you really want to pay this off, so when you get to 605 years old, you actually own the house. we mentioned last night around 35% of homeowners in the u.s. have no mortgage. they own the house outright.

well, that's a great aspiration. >> how would you encourage that? how, in fact, could you move people -- >> well, we have to rediscover this idea of savings. i like to say before fannie and freddie the gse era we had the savings and loan era. didn't end happily either, but there was something important about the name savings and loan. we forgot about the savings part of savings and loan, and the savings came first and then the loan. >> is it just exhortation? how do you do it? >> well, there are a host of products that were being experimented with and largely driven out of the market when this other stuff was so easily available that brought home ownership together with special underwriting if you had gone through counseling programs. there were shared equity which is where people are buying into properties but then have limits on what they can sell the homes for. so they get to do a certain amount of savings, but then some of the additional appreciation goes into preserving the property for affordability for the next family.

they get their next stake, they can move on. >> that was the bank or the community organization there? that would have been shared? >> usually a community organization, a land trust often owns the, has the -- owns the, creates the trust that does that, but then they find a bank to finance loans under these terms. there are ways in which you can have shared rainy day funds so that people can deal with the roof that needs fixed. most people don't have contingency funds, or these products where in the event you have a blip in income, you can get insurance to cover the month. there are a variety of innovative products we could test. one of the most important things we found during the crisis was delivery channels mattered. people who came through the nonprofit channels, bank cra channels and others tended to perform much better than they did when they were being originated through mortgage -- >> cra, community reinvestment act. >> yes, community reinvestment act. so we know a lot about what works and what doesn't.

the thing we've got to remember is there are going to be 100 million more americans here by the year 2050, and the proportion of that population is going to be much more minority, particularly there'll be most growth in latino, but also in asian-american, african-american. as the country grows, population's going to be mostly oriented in large metropolitan areas, some of which have done well through this crisis, some of which have not. and we've got to be able to make sure there is a basis for building stable, sustainable communities there. home ownership's not the only solution, but it's a very important part of it. when we talk about the role of the gses and others, we also forget the role the secondary market plays in the providing for rental housing. >> should it continue to be our goal to expand, in particular, minority home ownership, and what is a more sustainable way to do it? >> the products that my colleagues have mentioned, i think, are important. to make sure that the home buyers -- particularly minority home buyers -- understand the

product they're getting and aren't taken advantage of. the notion of subprime lending is not a bad thing in and of itself. but when subprime lending becomes predatory lending, that's when it's a bad situation. and i think we have to be careful of that. the second point that has to be made, and alex touched on it and i agree with him, is this has to be a mindset. there's a huge correlation between the tech bubble and the tech burst and the housing bubble and the housing burst, and that is that today's society -- and maybe this applies more to middle class home buyers -- wants instant gratification. a home is not a short-term investment. it's not a day stock. by the way, i think most day stocks aren't day stocks east. but a home is definitely not. you buy a home first and foremost because it's a place you want to live and, secondly, because in the long term it is a very safe investment. but not to be traded and to be turned over and over. i think that's another important mindset that we have to teach

this next generation of home buyers. >> as ed reilly pointed out, one striking thing about the poll is americans were as likely to cite non-economic as financial reasons for buying a home. let me turn back to the poll and ask your reaction to what really is, i thought, the central finding or the central core in the poll, that on the one hand americans still overwhelmingly see home ownership as the right personal decision for them and their family. they see it as a sign post on the road to adulthood, a milestone in kind of making it into the middle class. it is an important, it's still kind of an important intol of kind of -- symbol of kind of advancing in your life. on the other hand, they are much more ambivalent about public privacy meant to promote home ownership as a broad social good, and we saw them divided evenly on whether government should do what it does now or scale them back. and be we also found, i think quite strikingly, a majority saying that the efforts to expand home home ownership have

destabilized communities more than -- one of the arguments for home ownership is it produces more stable communities, but a majority in the poll thought it produced more destabilized communities through foreclosures and all the other problems associated with it. when you look across the panoply of things government has done to promote home ownership, are we spending too much, and are we pushing, in effect, too hard to encourage people to?qúo[jvn&s)z

. >> so the distortion that came in the market was really not from the government role which is largely kind of smooth bubbles and busts and helped with liquidity. the distortion came -- and i know alex will probably disagree with me on this -- because of the part of the market where we let it go wild. >> alex? >> i would say -- thank you. i would say that the respondents to your poll in their skepticism of the government are absolutely

right in their majority views. the attempts particularly through fannie and freddie who did, indeed, jump in and jumped in to subprime investing drove the housing bubble much higher, made it much worse than it would otherwise have been, gave foreign investors -- in particular interesting to people are the chinese, but many foreign investors; germans, chinese, japanese all over the world -- gave them way to inflate housing bubble, inflate housing prices, overextend credit without taking any of the risk. so the result of that intervention is today that ordinary american taxpayers like you and me are being taxed so that we can pay off the chinese and other foreign bondholders at par who lent money to the deeply-insolvent fannie may and freddie mac.

so what we got out of these programs is a very large distortion of price structure, of credit structure and of market functioning, and one of the main reforms we have to make is to move away from that back toward a private market. so, again, i would say the intuition of your heartland is a poll that someone's who's polled a pollee? a respondent? their reactions are absolutely right. >> shanna? >> i think, also, in the poll they said greed, greed, greed and that greed came from wall street and the lenders, and, yeah, fannie and freddie should not have jumped into the market and bought everything that they did. and in one respect something alex said earlier, i think i agree with, we've got to go back to a sensible housing market, and i believe if gses did not have shareholders, they wouldn't have dove into that.

and dismantling gses doesn't quite make sense to me. i think you have to fix it, get rid of shareholders, get rid of that profit-driven area. but we cannot leave lending in this country in private -- in if this country in private market. they have discriminated against various groups, and we do investigations, and our most recent look at this within the last year and a half found that african-americans and latinos who were more qualified than whites who went in to inquire about a loan were given loan products, but the higher priced loan products. >> let's dive in right there then because, obviously, we talked about it before with jared bernstein. what should the future of the gses be at this point? what role should they play? obviously, it's going to change from what it is now, but how far should it be reconsidered and in what directions?

jerry, do you want to start? >> well, first, let me comment on the previous question. 42-42, that's the -- 46-46 is actually pretty good given the environment we're in right now, and given the fact that if you talk to the american consumer and say what is the government's biggest homeownership program, they're going to say two names: fannie and freddie. and fannie and freddie right now have such bad press that i think if you told people that santa claus had two evels named fannie and freddie, they'd be against christmas. [laughter] it's very bad. so given that situation, i'm not surprised at all where we are. where should the gses go and whether they'll even be called xses -- gses, i think there absolutely needs to be a secondary market for the financial structure to move forward. >> and a government role in that? >> i think there has to be a government backstop, yes. and i'll give you two examples of why. the first, if any of you are old enough to remember the oil patch

days in the '80s when the commercial banking sector absolutely packed up and left oklahoma and texas. the only capital flow into those depressed states was because of the presence of the gses. they kept those states and anybody who lived there, anybody who did business there at that time will tell you that the presence of the gses kept those states above water. the second example is right now. even in their highly-crippled states, the fact that fannie and freddie exists has kept our housing industry from being in a worse situation than it is. so people who say we shouldn't have a government-sponsored enterprise or a government guarantee are ignoring the practical reality is. the third practical reality of the situation is if it goes to the commercial banks, mr. and mrs. taxpayer of america, you're still going to be on the hook because they all have government barn tees. so it's kind of a fallacious argument going forward. i think we have to look at prudential underwriting, we have to look at prudential

securitization. let's not forget those who securitize these loans, they're as much at fault as anybody who originated them. and i think we have to make the commitment those two elements need to be better regulated and move forward from there. that's our perspective. >> so the institutions we know as fannie and freddie are not going to survive in anything like we know in their current form. but i think, as does jerry -- >> i hope you're right about that. >> but i believe that there will be and there should be institutions who have a responsibility to provide liquidity to the marketplace who have access to a, essentially k provide their investors -- can provide their investors, global investors and your and my pension funds, provide confidence that for their capital to not be sufficient that there was a catastrophic risk insurance fund managed by the government that was available to backstop them. the key difference between

fannie and freddie and what we want in the future is that fannie and freddie had an implicit guarantee which meant they didn't pay for it. they were similarly capitalized because -- [inaudible] [audio difficulty] so they met exactly the level they were told to survive. but it wasn't enough. but these should be much more highly capitalized entities, and they should have a responsibility to the investors to pay for the government guarantee. that will create an accumulated reserve fund -- reserve fund that were these entities to fail, there would still be a way of protecting the fakiers because -- taxpayers. and were in the future that reserve to run low, you can charge more for the guarantee to fill back up like the fdic does and other things. that would give us the benefits of a guarantee. it should be targeted at the middle class. it doesn't need to be a jumbo market, but we can gradually

move that down. that gives us the benefits of the old system without giving up -- and avoiding the problems that we've seen. >> alex, there was a relatively positive nod of your head during that. [laughter] >> it's just a familiar argument. [laughter] >> well, we all, of course, know each other's views and particularly between home builders and think tanks, but we don't always see everything exactly the same. but i agree with jerry about prudential underwriting, fundamental high credit quality and, of course, we want secondary markets in all kinds of things. primary markets work better if their active secondary markets not only in mortgages, but let's say in stocks and corporate bonds where we don't think we need gses we have perfectly fine secondary markets, and they work. so my view of fannie and freddie and what should happen to them is they should be on a five-year

transition to the end of their gse status. gse, clearly, given the experience and poor structure, i'd like to say, look, you can be a private company, or you can be part of the government, but you can't be both at the same time. so in the housing finance system we have at the end of this five-year transition it will be vibrant private markets, there will still be government actors, but they'll be explicitly government actors, explicitly approved, explicitly appropriated by congress for the money they spend. but there won't be any gses. now, there may be organizations which are fannie and freddie. they won't be gses. they'll be privatized. fannie and freddie, and we'll hardly get there on this five-year transition. >> clarify one point. >> you said there would still be government actors. describe what that would be.

>> an fha, for example, with the department of agriculture, but these are fully government actors, not these hybrid, strange creatures which claim at the same time to be government -- >> so how do we get there in five years? >> uh, we know fannie and freddie had very little capital. they introduced excess leverage, i'll say hyperleverage into the financial system. one of the reasons they did that is because in their interaction with the banking system through regulation, banks were encouraged in many ways to help leverage fannie and freddie, including by buying the equity of fannie and freddie, an activity which caused the failure of a number of banks. so fannie and freddie, for starters, need to be right now given the same requirements as national banks. we take away the capital arbitrage and the hyperleverage.

they need to be put on a regular pattern by which their conforming loan limits are reduced from the top going down, and then we can observe, we will observe the private markets taking over. in the meantime, no one can compete with a gse. you have to get the gse out of the way. that was true when the gses had almost no capital, it's even more true now that they have no capital whatsoever. and in the end they then would be divided into a liquidating bank which will take a so-called bad bank, all of their old government-guaranteed liabilities to run off over time and a good bank which can be privatized and sold. >> if gses cease to exist, what happens to the mortgage as we now know it, and particularly 30-year fixed rate mortgage? what's the effect? >> i think the 30-year fixed rate mortgage will be available to those people who have enough wealth to pay a higher premium for the value of the longer --

the private markets will not provide it for most commonly underwritten loans. it will certainly not be available to low and moderate income families. that will have the effect, i think, of adding additional economic insecurity. if you think about it, who is best positioned to hedge the risk of interest rate changes, is it investors or families? think about the transaction cost if suddenly your mortgage costs 20% more after an interest rate adjustment. a larger part of the market to the extent there is a 30-year mortgage, it'll be an fha. in the alex's world, there will be a much higher percentage without this intermediary space, a higher percentage of the market in fha. and, remember, the government bears 100% of the risk with no capital cushion ahead of it whereas in the structures that i and jerry and others have been talking about, there would be private capital at risk in the form of the secondary market, and there'd be the risk

insurance fund. so we're actually going to take on risk on loans directly that we don't need to take. >> if you eliminate the gses, what happens to the mortgage as we now know it? >> she's exactly right, the situation becomes one of great inequity, and you're talking about an area where the upper middle class and the upper class of america will have access to capital at a much greater in much greater numbers than the lower middle class and minority groups. when you look at, as i said earlier, when you look at housing, you have to look at it from both the social perspective and from are the economic perspective. and what alex is proposing may make economic sense, but it completely ignores the barometer of social policy. and when you look at the poll, and 90% of americans want to be homeowners, i think those 90% of americans would say the government should play a roll -- role in that. shelter is one of the most basic human needs whereas invest anything the stock market isn't. i think you can make a strong

case that what alex is talking about may make economic sense, but you have to have balance. >> in the survey 58% of non-whites want government to continue doing at least as much as it's doing now. among whites, only 41%. a stark racial divide as there is on many issues involving the role of the government. shanna, what do you believe -- what kind of mortgages would be available in a world without gses? if would it significantly change? >> i totally agree with what sarah and jerry just said. i don't have anything more to add. >> okay. >> it would be devastating. >> now, you -- >> thank you. [laughter] >> would the 30-year mortgage go away? would down payments go up? what, what's happened? >> first of all, the 30-year mortgage would not go away. in a principally private system, there'd be a rich array of types of mortgages. the gse subsidies would go away. now, you're not asking an essential part of the question which is what happens to house prices. >> with right.

>> all subsidies are transmitted by market behavior into prices. so when push subsidies on markets, what we have done is push up the price of houses. and one of the best things you can do for home ownership -- although perhaps not for home builders, jerry -- is to have, to cease to have a distortion which pushes up the price of houses. so you have houses whose prices are better. i just want to comment on the 30-year mortgage -- >> alex, could i just ask you one -- but wouldn't that, if you're paying for the gse, that wouldn't exist -- >> i always get this argument. it's my view, and others like me, that you can't cite a single instance in which the price of government guarantees is ever adequate to the risks. part of that is the guarantee itself creates more risk as we saw in housing finance. but let me talk about the 30-year mortgage.

we tend in housing finance discussions in this country, although in almost no other country, to enshrine the 30-year mortgage with a shining halo and make it into an icon. this is, this is a mistake. so if i could, i'd just like to talk for half a minute about the dark side of the 30-year fixed rate mortgage. >> okay. [laughter] >> one of the biggest problems in the american housing market and housing finance market right now, today, is precisely the fact that so much of our homes are financed on 30-year fixed rate mortgages. let's ask what is the situation in which a 30-year fixed rate mortgage is terrible for the borrower? forget about all the problems it causes for lenders and investors. why is it terrible for the borrower? answer is when interest rates are very low, but house prices

are down o -- so that you can't finance. well, that's our situation now and over the last three years. so the boar recorder -- boar -- borrower is locked into what becomes a very high rate relative to the market, cannot refinance at any price. it's not only a high nominal rate, it's an even higher real rate because the asset is deflating. so the entire asset deflation is put on on the borrower through e 30-year fixed rate mortgage whereas in this situation in an adjustable rate market like the classic mortgage you'd be -- classic british mortgage you'd be paying 1%. we wouldn't be standing on our heads with government programs trying to force modifications of 30-year fixed rate mortgages. the modification would have happened automatically and the debt service gone in half.

so nothing is good for all seasons and all times. 30-year fixed rate mortgages are good for borrowers when house prices are reliably inflating, they're terrible for borrowers in a house price deflation which is what we have now. >> let's bring in the awd yes, - audience for some questions. and, ed, if you want to come back and join us as well, we'll put ed up at the podium. i think there's a microphone over there, and is there one on that side too? anybody have some questions from the audience? about either the discussion here or the poll from before. yes. identify yourself real quick. >> jeff lister with the realtors. alex, i've heard you say before that the government's never adequately priced risk or credit, and fha is an example where there's never been a subsidy since the '30s. better than the private label securities that did much worse without any federal guarantee. so what do you say about the success of fha that looks like

it's not going to need federal subsidy? we don't know for sure yet. >> fha has, of course, had several periods in its history which it's gotten into deep credit trouble and been a large source of foreclosures and vast tracts of fha foreclosures, notably in the '80s, also in the '60s, and its driven delinquencies are high recently. but if fha is the best example, which i agree it probably is, unlike flood insurance, unlike savings and loan deposit insurance, unlike gses, since on my view the fha would continue to play an important role, then i appreciate your point very much. >> all right. while the audience is waiting, the next question from the audience, one thing we did not get to and which the poll, i thought, was striking when we had the question of what to do about the mortgage interest deduction which has not really

been a subject of political debate. there really hasn't been anybody out there, political leaders, making a case against it. and i think that's often a cue for public opinion, obviously. even so, we still have 43% of the country saying limit it, roll it back or eliminate it even without kind of getting a cue from, from political leadership. um, to what extent do you think there will be a debate, particularly in the context of tax reform and deficit reduction, about either retrenching or eliminating the mortgage deduction? >> i think there will be a debate. i think the likelihood that we'll see dramatic change is relatively limited at the end of the day. but i think the size of the deficit problems that we face mean that every tax expenditure is on the table, and this is an enormous one. the amount that fannie and freddie has lost is less than we spend on the mortgage interest deduction in a single year. and the fact of the matter is

the way the deduction is currently designed is that its value goes disproportionately to those who have larger homes and are in higher tax brackets. so it seems to us that it is like hi to have a debate -- likely to have a debate. i think there is some possibility that it may be redesigned and things like second homes and other things may eventually, the top may come down a little bit. you know, jerry's absolutely right, those decisions have economic consequences in particular geographies. i can anticipate the argument. and i think he's right about that, and i think that's why people will be very reluctant to do that, especially now when the economy's so weak. but it may be something that we start to talk about now and talk about imposing before the year's out. >> ed, who is the audience for that kind of change? what groups were most open to considering -- is it a basic ideological role of government divide, or are there any other meaningful fissures? >> obviously, those who are in

the market who are renters are more likely to want and see change in that, and those who are, those who are, you know, from an ideological perspective, republicans are more willing to accept that even if they are, even if they do have mortgages and do use the deduction. so i think -- but i do think the one point about all of this is that there were very strong population groups on both sides. while there was a consensus on dispairtive owning, what you saw here was a divide, and i don't think that's a recipe for swift legislative action right now given the nature of our discourse. >> shanna, alex, what, to what extent do you think there will be a debate, and in your mind, you know, a blank piece of paper, where would it end up? >> i think there should be a debate, and i think what we need to see and i think someone mentioned last night the carrying of the access to the mortgage interest rate deduction. i think low and moderate income

people, it helps them. i think people with second homes, they have rental income, they're able to depreciate the property, so they have some other benefits that they receive from that. and i was thinking, you know, in the mid 1980s when the tax reform came through and we were no longer able to deduct our credit card tax, our car interest tax, our other taxes, we still bought cars, we still used credit cards. so i think, you know, there's always an adjustment period, but i agree with sarah that we have to have some reduction in it, but have it benefit low and moderate income. >> jerry, i'm going to let you back in. alex, is this a treadmill where the deduction costs government money, but it simply raises the price of housing and, basically, buyers are, might not be any better off than they would be without it only we've spent a lot of money in the meantime? >> yes.

but, given the fact that the tax advantage gets put into house prices, this is one place jerry and i do agree, i wouldn't do anything now to put further downward pressure on house prices which knocking this out now would do. two other things we might think about. one is there's another very important tax change which is relatively new historically, the 1990s, and that's the exemption of capital gains on houses. from tax. that's also a very important tax effect which probably fit the bubble alodge with other changes -- along with other changes. second is from an overall point of view you don't need the interest deduction on mortgages to have a housing finance system. our neighbors in canada don't have it. they have a home ownership rate which is now higher than ours. but that isn't where we are. where we are now is with the

structure of prices having included this. so it's a fine time to have the debate, but i'd say it's not a fine time to change anything. >> where would you take it in the long run? would you eliminate it? would you convert into it a credit? what would you do? >> well, among all the other things i would do in the long run, that would be on my list, but that's long run. >> eliminate. >> that's sometime after 2016. >> jerry. >> i think the concept of tax reform, i draw the analogy there's a scene in the movie "the godfather," where michael corely krone is making spaghetti sauce in the kitchen, and he says, you know, how bad is this war going to be? and one of the godfather's guys says to him, you know, it's going to be bad. this has to happen every ten years or so, we have to clean out the bad blood. and i think that's exactly like a tax reform debate. [laughter] every ten years or so there has to be a war. we have to clear out the bad blood. in the end, the mortgage interest rate reduction will remain the way it is.

in the short term, because it's ludicrous to do anything to further destabilize the housing markets, and in the long term because of the polling numbers of the people who say they want to become homeowners and view the mortgage interest deduction as an important component in their efforts to become homeowners. >> could i just make a comment, please? is. >> yes. >> the great financial writer in 1873 pointed out we have a financial crisis every ten years. there's another -- he's the godfather of central banking theory. it's every ten years, so get ready. >> so would your position be as is, no change? >> >> yes. >> now and forever? >> now and forever. [laughter] >> you were talking, you would do what, you would make it -- >> i agree with alex that doing, that the market is very, the housing prices are very stable. particularly be if we're talking about withdraw liquidity in any way as we bring loan limits down, there's going to be very tricky stuff happening to home

values, particularly on the coast where they're high. so i think there's got to be a great deal of care and concern about coordinating. in the long run, i would turn it to a credit because it's more equitably distributed, and i would probably reduce its value over time so that you're really hitting middle class homeowners and not subsidizing the prices of houses beyond that. but i would not begin to phase that in for quite a while until the economy is on much sounder footing. >> um, all right. now f we -- let's see, do we have a question? one more from the audience. >> is this on or should i just talk loud? >> no, you're good. >> we talked about fha from the perspective of, you know, the government exposure to the risk and are we pricing adequately for the government backing, but i wanted to ask a question from the borrower's perspective. when someone asked about access to credit for people of color, you know, jared bernstein kind of went to that's fha. although he talked about it in the low and moderate income terms which are not necessarily

the same thing as i think people of color in this room would probably recognize. my question, if you're a person of color or moderate income and you want to be a homeowner and fha is the only product available for you, is that a good thing, a bad thing or, you know, indifferent? >> >> shanna? >> everybody talks about competition in the market, and i think there always has to be that competition. right now fha, you may your mi, your mortgage insurance, for the life of the loan. and if you're in the private market, you can get that 80, you know, get 20, 25% equity, and you can get rid of that payment which is a very high payment right now. i think fha should just be one of the alternative products that are available, and people should not be pigeon holed into a particular product. i don't think it's the cheapest product. >> jerry? >> i agree completely. >> i worked at fha for five years, and i think it plays an essential role, but we don't want to see a world in which we

have fha neighborhoods and private market neighborhoods. that has been in the past, as alex alluded to, an opportunity for the bad guys to sort of swarm into the program and to have a depressing effect on home values in the those communities. and i don't think we ought to have a world in which the government deals with low and moderate income neighborhoods and the private sector sevens the rest. serves the rest. seems to me we ought to be able to find a way to incent the private sector into serving all of our markets because, ultimately, there are plenty of completely profitable, affordable loans that can be made without subsidy in those communities if people learn to underwrite them, and if they're not in those markets, they'll never figure out how to do it. >> we've always had a dual housing market, and the report came out and said there's a black and white america in the mid '60s. fha in the '80s was in detroit, and it came up because appraisers went in and real estate agents went in and sold homes whose furnaces weren't

working, they sold them in the summertime, and people bought homes that had no heat. and so fha was the only financial market except for some mortgage brokers in the '80s in neighborhoods of color, and we can't go back to that dual market. >> we're slightly over time, so i want to ask a final question, and if we can maybe a sentence or a yes or no or pick an option. all of you, alex made the point before about trend versus cycle. do you think we will as the economy recovers in the next few years, do you think we will return to a housing industry that, basically, has looked fundamentally as it did before we went into this downturn with recognizable products like the 30-year mortgage and a steadily rising percentage of people who aspire to and, in fact, own homes, or do you think we are at an inflection point where the market and the way that people choose between owning and recollecting and the way that they would try to buy a home are all going to look very different even as we recover?

>> uh, we will have more diversity, there will be changes, but some of the old will return. >> okay. >> home ownership is still the american dream. it'll remain the american dream. and the market will recover eventually. >> i hope we have a blend of the two issues you just discussed. >> the trend will continue. we'll cycle back up out of this down phase, but, of course, in the future we'll continue to have cycles, especially in real estate. >> all right, well, great. it's been a terrific panel. would you join me in thanking them? [applause] and we have one more treat for you, henry cisneros, former mayor of san antonio is going to join me on stage for a conversation about where this -- how this push on home ownership began and where it's going. thank youment thank you, that was great.

[inaudible conversations] >> all right. we have hoped we've saved the best for last. henry cisneros, former secretary of housing and urban development under president clinton, former president and see owe of univision and today, chairman of citi view companies which work with developers to build affordable housing across the country. as dean acheson might have said, you were present at the creation of the really two administration long push to expand home

ownership, and to really kind of force this into debate as not only an economic, but a social goal. what was the thinking at the beginning of this effort? what were the benefits that you saw from increasing home ownership rates? and then we'll talk about the lessons you take from this experience. >> ron, thank you for the question because i think it gives me an opportunity to really kind of frame the moment where some of this began. before i do that, let me just thank the national journal and the atlantic company for this effort. i have participated in a session last night and was present all this morning, and it struck me that this is the first of many, many, many postmortems on the economic issues and the housing issues that really focuses seriously and hones in on the efficacy of home ownership. because it's right at the heart of what we need to decide for the future. what do we really believe as a country about home ownership? so this is a very important conference, and thank you for your role in moderating as much

of it as you have. i remember the moment in 1994 when the head of fha and who now runs the harvard joint center for housing studies came in and said we're looking at economic data that suggests a very strong and potential long expansion. and the opportunity to harness that expansion and make it work for average families through home ownership exists. in retrospect, we know that that expansion was the longest expansion in american history, that it produced levels of employment, reduced unemployment, resulted in the formation of new businesses, reduced poverty to the lowest numbers that had been on record since poverty statistics were kept through that period. and i remember a moment later in the rose garden talking to

president clinton the morning that some new numbers came out on a very obscure statistic which is the distribution of income, and we actually had moved the distribution of income in a positive way. >> you had a good coefficient? >> exactly. you know the ratio. >> yeah. >> but the long and short was that the argument was being made that one way to have the benefits of this reach people -- aside from jobs and incomes -- was to create the conditions in which home ownership might be expanded. the previous high in home ownership had been 66%, and that was achieved in the about 1966. at that -- in the early '90s we were about 64% or so. >> when you came in, right. >> when we came in. and can we didn't do a -- and we didn't do a lot. but what we did do, for example, was we pulled together a coalition of 45 organizations, a home ownership coalition that

included the community bankers, the american bankers' association, the mortgage banisters' -- bankers' association, many, many other advocates like shanna's group, for example, on fair housing, many groups, and said tell us what needs to be done and what we can do to advance the home ownership rate. the goal was, basically, to create opportunity, and the thought was that we might get to the 66% which had been the all-time high. but at that time there was no thought that we would, you know, move into is stratospheric levels that we saw later. and, frankly, i think looking back at it it was completely the right thing to do. and as we get through the questioning, i can talk about what happened later after 2000 when a lot of other folks discovered -- >> well, let's talk about that first period. what were the principle levers that you used? there was tough, there was renewed attention to the community reinvestment act,

there were some changes in the rules for fannie and freddie in terms of what kind of mortgages they purchased. what were the levers that you used? and, perhaps, how did it change after 2000? >> >> well, the levers -- the two that you mentioned are real, but they've been exaggerated since by critics who say somehow that cra only -- obligations prompted the banks to do things they shouldn't have done. the cra obligations weren't changed, just stressed, just enforced. and the other dynamic that was at play here was previous to 1992 and the start of the clinton administration there'd been no oversight of the gses. but legislation in about 1992 created what then was called, odd name, the office of federal enterprise, housing enterprise oversight, ofeo. a woman named alvarez came in from first boston to head that, and she did a fabulous job of

oversight. but you can imagine a small hud office, an assistant secretary level person, she later became head of the sba, overseeing the massiveness of the gses with their lobbying power and their, you know, strength. >> they didn't like being overseen. >> they didn't like being overseen, but she did a good job. we were in constant fights with them about the oversight. and they had strong congressional voices, and it was a very tough environment. but one of the things that she was required by law to do, the same law that created the oversight, was to stipulate moderate and low income housing goals for them. and that was always an annual exercise when her office came to the hud secretary and suggested what the numbers ought to be for that year. i was very cautious, it's just my nature having been a mayor, that you work with the private sector and you try to strike kind of a middle ground and never push the recommendations to the max. so i don't think we overstressed the gses, but we did for the first time impose some goals on

them that required them to be active. so those were two of the levers. the principle lever, however -- not really a lever -- was kind of job owning. we had home ownership summits all over the country with these same 45 partners and their local counterparts, the american bankers' association, home builders and others. basically arguing for regional and local analogs to our national effort to encourage opportunity in home ownership. one of the principle dynamics here was the recognition that while the home ownership rate in the united states was 64%, the african-american and latino home ownership rates were 42% at that time. fully 22% below the national average. later, as both rose and the minority home ownership rose faster, that is to say it closed more points in gap, the home ownership rate for the country got up to 69, the white home

ownership rate got up to 74, but the minority home ownership rate got up to 49. never got to 50, but that seven-point gap from 42 to 49 was faster than the -- was greater than the 64 to 69 for the average. and white homeownership rates got up to 74. but that was a 26 point gap or 25-point gap from the white home ownership rate to the minorities even at the highest point. >> let me ask you about the overall that correct ri. a couple years ago you said to "the new york times" noting the 69% level; you think you have a finely-tuned instrument you can use to say, stop. we're at 69% homeownership, we should not go further. there are people who should remain renters. but you really are just given a sledge hammer and an axe. blunt tools. >> that's been a theme of what i've known about government for a long time. when i was mayor of san antonio, i thought i had a fine scalpel to do sort of surgical public

policy or a rheostat where you can turn up the lights in the room to exactly where you want them when all you really have is, you know, a sledge hammer, this very blunt instrument. and some have criticized and in some self-interested ways the governmental initiative in the home ownership as having created this. but i would argue that there's a dramatic difference between the measures that we took and the levels that we achieved and then what happened later. >> all right. talk about the difference in your mind. >> well, i have to talk about what happened later to do that. >> right. >> but i think what happened was the momentum was recognized and then hijacked. and several of the presenters this morning have talked about the elements of it. but there came into existence really abusive retail interests, companies like aher quest, for example, that no longer exists and others, highly publicized in all the books that have been

written about it. they came into existence for no purpose other than subprime lending and even predatory lending. you had people who came from other businesses to do this at the retail level. they did this in part because there was demand from wall street that had discovered this and was beginning to package in the form of special investment vehicles cdos and other devices that they created, the intricate tranches they would split out of risk to sell into the international market. so you had all kinds of wall street companies making obscene amounts of money, as we know, with compensation systems that encouraged people for how much they could package irrespective of the quality of it. there was almost no concern for the quality as it moved into international markets. we know there was a kind of a glut of money in world markets. chinese money, petroleum money, european money and countries like iceland and germany and others bought this. we had the rating agencies

rating it the way that they did, aaa ratings for even the most dangerous tranches. we had the federal reserve continuing to express concern about the earlier dot.com bust and keeping interest rates low so there was a world awash in capital. and i think the fed has not ever been sort of held to account for the dimensions of their complicity in this. we had chairman greenspan, for whom i have great respect and worked very closely with. i was once a vice chairman of the federal reserve bank of dallas. but who was advocating a deregulatory mindset that didn't recognize the immensity of what was building all this time. >> you were on the board of countrywide -- >> later. >> later. >> and i'm happy to talk about it. >> and they, obviously, became enmeshed in much of this. i'm interested in what you're kind of suggesting. the mindset was, obviously, there wasn't a lot of attention to the quality, the loans are

being sold off as securities, it would be securitized, no t a lot of attention to the quality. did that ultimately, basically, when you talked about kind of moving beyond the boundary, you know, in your observation, is that essentially what happened? basically, you had to go to people who were more and more credit risks and, ultimately -- >> i think what happened -- >> not in a position for home ownership? >> i think the government, and i'll go back to your point about blunt instruments. we started a process, and you never -- one of the things i regret about this period is not knowing what form it would take, where it would go, who would, who would abscond it, you know? so there's that. you tried to do the right thing, you neverñí

>> i mean, local officials as a mayor, cabinet officer, board of countrywide -- you've been a developer now for the last few years. and some of those projects have had difficulty in -- >> the "new york times" put me on a cover of a piece about two years ago as the face of the crisis. that's not a pleasant -- [laughter] >> the full sunday picture. [laughter] >> and one other dimension that you informed us of last night that you live in a very working

class immigrant neighborhood in the home of your parents or grandparents. >> grandparents. >> i mean, you've seen this from many different angles. let me ask you -- >> let me go to the countrywide angle for a bit because there's an intersection that's kind of interesting. first of all, before i go to countrywide let me say about fannie and freddie. first of all, let me tell you the business i'm in. today what i do is assemble constitutional capital and invest it in middle incomed housing and i've done that since the year 2000. we built about 7,000 homes across the country in 12 states, about $2 billion worth of housing value. very focused on the middle man in the city. so it's a little bit exempt from the crisis because that tends to be suburban large track homes. i say that because auas i -- as i return to the housing field, in 2000 and started this company, which is what i want to do the rest of my life, i was

asked to go on fannie's advisory board, which is not the governing body and which is not compensated. but it gives you a kind of insight into the way fannie and freddie operate which i'd known from a distance being the head of the oversight body, but not as a filter. so i'm at a meeting about 2002 and frank rains is making a presentation on the efficacy of subprime. in effect, he had a white paper done by, you know, ph.d. rocket scientists who said that subprime is not a bad thing. subprime is just a way to price risk. so if you extend to people who are -- in categories that would not have been qualified before, you simply price it higher. and you can be fiduciariarily

responsible to your company and not create potentials for huge default and get more people involved. so he was making kind of a politically idealistic and socially relevant case for subprime being a viable instrument if you think about it as a mathematical device to price risk. and expand -- and expand homeownership. so that was clearly a kind of decisive moment in the thinking of fannie and freddie. and they were motivated not only to expand homeownership but because they saw others going there and felt the need to -- to be relevant in the market. >> were you convinced at the time? >> well, i was skeptical but there was -- there was -- i'm not in that business, so i was -- so it didn't strike me as completely right. it struck me as something to watch and be careful of. but you may remember there was a group called fm watch that came into existence which was the private providers of mortgages,

and they were pressing fannie and freddie on the market side and i think fannie and freddie at that moment felt like they needed to get into this business or they were going to lose market share. so that kind of tells you kind of a little bit about fannie and freddie's entrance into spheres where they had not been before. and it's not the government that forced them there. despite the critique that's the case. it was market factors. and then they took it to the extreme and they had their own expense issues and accounting issues and mismanagement issues that created the crisis. >> before we bring in the audience, the question i want to ask you, though, is as i said having seen it from all these perspectives, do you think the gap between the minority level of homeownership and the white level of homeownership can be significantly reduced? and if so, what is a more sustainable way of doing it? because obviously the method that we tried over the last two decades ultimately ended in tears, however, it started. >> wrong it's not what we

tracked it's what happened. as certain elements decided it was a pertinence on the ground force. >> how do we get back -- >> we avoid that for sure. i mean, we deal with credit standards that are more responsible. we encourage people to become homeowners but on a steady basis recognizing that not everybody can at any moment. i've never indulged in the game of what the homeownership rate ought to be. but sort of the facts on the ground tell us it's probably around that 66% hike that we have been before and about where we are now. i mean, the interesting thing is, we're at 66% now after this crisis and 66% was the all-time high in the history of the country before this. >> uh-huh. >> so we're -- we're still at a very high level compared to our historical norm. and we're at a point where -- you know, it seems sort of reasonable, a clearing point where homeownership rate ought

to be. clearly, it takes a while for immigrants to become homeowners. maybe an entire generation. maybe the first generation can't be homeowners. but their children can. but the kind of effort we have made in the past where communities are involved and churches are involved, minority organizations are involved -- in order to get people prepared through homeownership counseling, intensely working on the ground in ways that are fair and responsible -- i think those are the kinds of mechanisms that have to go forward. >> i want to bring in the audience in a moment. >> i was just going to say we clearly don't want to unleash those forces that were unleashed before without supervision. and that tell us that the derivatives market needs to be overseen. that tell us that you can't have this kind of on the ground retail operation without some sense of professionalism of what people are maybe even licensing or certification for mortgage

brokers. it tell us that the rating agencies have to operate according to better standards and we know that's sort of en route to happening. and a lot of other elements of this that just got out of way because the way our system works. >> two policy areas and maybe a couple of questions. some of the panelists on the previous panel argued and there was a debate about this. would retrenching the role of the gse's reduce access to homeownership for moderate-incomed families? >> well, it depends on how far you retrench. if we eliminate the role of the gse's i think the comments made by shanna and sarah and jerry howard are correct. we would have trouble sustaining the 30-year fixed rate mortgage. we would have trouble in times of economic retrenchment offering and continuing the strength of the housing sector which is so important to the economy. so the answer is, yes, if we eliminated them. i think what's going to occur is

that we're going to keep some of the essential function. they won't be known as fannie and freddie and i don't know what happened to the buildings on wisconsin and out in mclean and all the people who were in them but some kind of different structure will exist because the function of securitization of collecting mortgages at the -- that's what happens when you talk about fannie and freddie. [laughter] >> yeah, yeah. [laughter] >> i think that the function of assembling mortgages, securitizing them and creating liquidity so that money could come back into the housing mortgage system is absolutely critical. other countries that don't have it seek it. and if we didn't -- if it didn't exist, we'd have to invent it because it's been so powerful. and we have to separate the good things that that system produced from the abuses that followed. one of the critical things we have to do in this episode is disaggregate the lesson and make sure we're not reacting to the wrong set of facts, the wrong

lesson. i think what caused this problem is not the fact that we had securitization of mortgages for the last 30-plus years. >> i want to save one policy question for the end and see if there's any questions from the audience. you've been very patient. anybody -- yes. just identify yourself real quick, please. >> i'm ron clark. and i want to get back to the question that was asked of jared bernstein when he was asked what the connection between education policy and housing policy is. he answered primarily through an education policy, i think, but i was wondering if you could explain how you see the secondary market working to provide affordable rental housing opportunities in areas that do have higher opportunities in the terms of jobs or schools or anything along those lines? >> well, it's an interesting fact, not discussed much today but fannie and freddie have been absolutely essential to the provision of rental housing over

the last five years or so. through the buildup of this crisis and during this period, you really could not build a partner in the united states without fannie and freddie. we just wouldn't have had construction lending and support for the multifamily sector without fannie and freddie's presence. i think that's another element of what we need as a function of the government of the gse's going forward. and that's -- and that's critical because we need more balanced housing policy, and we need more apartments. yes, homeownership is important but for the first time in many, many years, over the last several years, there has been very little production of apartment. a company like tramaco residential that has built hundreds of thousands of apartment units across the country, last year, in 2010, for the first time in its history, started zero, not one new apartment in the united states. so we're going to have a problem

on the apartment side. apartment, multifamily people are happy that prices are going to rise but already we know that there isn't a single market in the united states where a family earning the minimum wage can afford the rent -- fair market rent on a two-bedroom apartment. it doesn't exist. families are both overcrowded. they are finding, you know, unsafe -- finding themselves in unsafe substandard apartments. we need the gse's involved in that as well. >> you spoke about education on the outset -- >> well, i guess -- my question was kind of a question of geography and opportunity and making sure that you're getting the right kinds of rental options in places -- >> okay. >> i guess the lights go out when you talk about frannie and freddie, the sign fell down. and just making sure there's an appropriate distribution of rental housing opportunities so

you're not having reconcentration of poverty. >> right. >> you're not having concentration of affordable housing in areas that have a high concentration of people with color. that type of thing. >> it's a very hard problem and you talk about your situation in san antonio in a historically depressed part of the city. that was homeownership. >> home development. >> but the issue you raise of building apartments at moderate prices and affordable prices is a very tough one in most places because of opposition on the part of communities. but we've seen some progress in recent years, frankly, the progress we've made in eliminating the worse of public housing through the hope 6 program has allowed mixed income multifamily in central city neighborhoods across the country that's generally regarded as very, very positive. places like atlanta where they have now -- the only housing authority in the country that has eliminated every single one of its old-styled deteriorated

public housing projects and replaced them with mixed use multifamily apartments. >> let's go over here for a question. >> if homeownership and house prices are tied to the unemployment rate and we have a high unemployment rate right now, i think you have to ask the question, is the employment rate sustainable? because if you look at our unemployment rate right now, we say it's high but on a historical basis, based on the percentage of a sort of adult-age working -- people that could be working, our employment rate is actually higher than, you know, if you look at the 1960s or so with more women entering the workplace. so, you know, i really have to wonder, are there going to be jobs that will continue to support sort of two-incomed families, you know, jeremy rifkin wrote a book "end of", you know, are we getting to that

point? >> you're right the unemployment crisis is more severe than the statistics indicate because in addition to the fact as you mentioned are people who have fallen out of the labor force. that is to say, they've been in it -- unemployed so long that they fall out of the labor force and they're not even counted as unemployed. so some suggest the unemployment rate is really probably 11-plus right now. it's a very serious problem. and clearly, it is a problem for the -- the housing industry. but there's a kind of symbiosis there because not only is unemployment keeping people from having the confidence to buy and be able to rent, but the failure of the industry to restart is hundreds of thousands of jobs. in ordinary times, the housing industry and all its elements, construction, finance, transportation, materials is up

to something like 17, 18% of gdp. so it's very, very important. we have not had an economic recovery since the end of world war ii that wasn't led in a significant way by the restarting of the housing industry. we're not getting that in this economy. so there's a real connection there. and, you know, i remember as mayor talking to a builder of a major developer in my city, the one statistic i have to have to know how much i will build, whether i will build this year is the employment numbers, the employment growth numbers. so that's -- you know, unless we suspend sort of commonsense economics, we've got to get the jobs machinery started again if we're going to get the housing sector. and the housing sector has to restart in order to get the jobs machine regoing. so it just points out how important it is to this administration to focus on things like eliminating the foreclosure overhang and other things that was talked about

this morning and others in order to get this jobs/housing relationships right. the other element is the other one the gentleman spoke to which is, of course, education and we now know education is so critical to the nature of the new jobs that must grow in our society. there's kind of a new iron rule i have heard described as high skills equal high wages, low skills equals low wages. and to prepare our people for international trade professional services, health care biosciences, new media, all of the elements of the new american economy, education is clearly important. >> let me close by asking about one other hot button policy area. and we heard on the panel that the mortgage interest deduction should not be revisited now today or changed today while the housing market is so depressed.

but you were on a panel, a bipartisan debt reduction panel, sponsored by pete dominici, that reform with a refundable 15% credit. talk about why you were able to endorse that proposal and what effect you think it would have on housing going forward? >> well, i think the principal motivation for my signing on to the whole report we have a massive problem in the country with respect to debt. it struck me in the very first night of deliberations of this commission that we were told this cannot be solved through the normal mechanisms. it can't be solved by cutting programs. it cannot be solved by raising taxes. it cannot be solved through growth. in fact, we have to have all of the above, on a major scale. big time cuts, substantial increases in revenues. and stimulate the growth that will grow our way through this. and failure to do that is -- let me see if i can get the numbers

correctly. we have presently a ratio of debt to gdp in about the 60s. where the traditional norm has been about 35, 36% since the end of world war ii with one blip in there which was world war ii itself, right? we're now on a path whereby 2020 we'll be at a 100% of gdp and by 2030, 200% of gdp. we've never been there before. no successful industrial modern economy has ever been there before. so even as a democrat, as a progressive, as a mayor working at the local level, i understand the immensity of this challenge and what needs to be done to get it under control. so that commission in the final analysis recommended a lot of things that are very difficult. like a value added tax. like cuts in defense and tweaking of entitlement programs. we didn't get into the social security age. we did it in some other ways. but one of the things you have

to acknowledge is that the home interest -- the home mortgage interest deduction is a huge tax expenditure. it's a massive number. and while i don't advocate fiddling with the fundamental mechanism, it's certainly viable to me to think in terms of second homes, vacation homes and boats and all the other things that are covered. so that's kind of where i was coming from. in the final analysis, we opted for a credit as opposed to the present structure and many advocates think that's a superior way to do this because one of the things we did to make the tax increases palatable in this report was to simplify the tax code. we got tax reform and elimination of a whole lot of special interest credits, corporate credits and so forth, for a simpler tax structure, and this fell in that.

>> we're going to go -- we're going to let everybody get out, jerry, on the previous panel was pretty confident that the mortgage deduction would remain as it is, even as the deficit conversation grows louder. are you confident? >> i think how serious the congress ends up being about the debt and deficit overall. if they're really serious and they put something on the table that hurts a lot of interests in order to get the, quote, big deal that's been described, then i think there will be changes to the home interest deduction. but it will not be eliminated. it will be things like second homes, vacations homes, boats and other things that would probably be taken out but as jerry howard said in a private conversation earlier, all of those are there for a reason. there are interests and powerful interests that protect each one of those so it's not an easy fight. am i confident that we're going to have a big deal? no. do i think we're going to somehow muddle through this? i hope so. muddling through would be a victory in this case.

[laughter] >> well, we have hopefully more than muddled through three hours of pretty stimulating conversation. we appreciate all of you staying with us. i don't know if john has any final words. i hope that you will join us in the future for further discussions in the heartland monitor series. every quarter we try to explore how average americans are navigating the economy in both the poll and a supplement which you have with you and thanks again for joining us and we'll see you in a future media atlantic event down the road. thank you. and i thank secretary cisneros. [applause] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> we'll have more live coverage on c-span2 at 1:30 eastern we'll bring you a discussion on the role of civil society under the new government in egypt.

a number of egyptians will offer their perspectives. again, live coverage at 1:30 eastern. >> c-span2, one of c-span's

public affairs offerings weekdays live coverage of the u.s. senate and weekends, booktv, 48 hours of the latest nonfiction authors and books. connect with us on twitter, facebook, and youtube. and sign up for schedule alert emails at c-span.org. >> the treasury department says small businesses across the country are having trouble getting bank loans. officials announced three states so far, california, michigan and north carolina have received funds under a new program designed to ease small business credit. several lenders joined a discussion during the conference of small business loan availability. small business administration administrator karen mills leads this discussion. it's about 50 minutes. >> the moderators and panelists from the first two panels. we're right about to begin. panel 3.

great, our third and final panel will focus accessing credit throughout the lifecycle of a small company and it will be moderated by administrator karen mills. i'd like to introduce the following panelists who will join karen mills on this following panel. michael aragetti president of airies capital, greg becker president of silicon valley bank, william binen, ceo of enterprise corporation of the delta and finally, jessica jackly a ceo and profounder of kiva. welcome panel three. [applause] >> i see by the amount of conversation taking place during break that we already are accomplishing some of our goals here, which are to get as i said some of our best and brightest

from the community to generate ideas on working with us on pushing ahead on these issues. this panel is focusing on the credit side. we talked a lot about early-stage equity investments and we were actually going to just focus on equity on this panel and tim geithner was talking about this and he said, well, wait a minute, i know we did a panel, which we did about a year ago on access to credit when the credit squeeze was on. but don't all these high-growth companies also need credit and a different kind of credit? so we're going to focus right now on credit at all stages of the lifecycle of these high growth companies. and i've got a terrific panel to do it. we're going to jump right in and go a couple rounds with the panel and then come to the audience again because that has, i think, really proved to make the discussion quite rich this

morning. i'm going to start with greg. and, greg, you're the president of silicon valley bank but you don't just operate with silicon valley which is a good thing because as we talked about, there are companies all over the company, and i think you serve many of them but you have some of the most successful venture companies as clients, 4,000 of them. and you're providing them with all kinds of capital. but when i travel all around the country and i talk to these high growth companies, they say we're not bankable. we're not bankable. we can't find anybody who will look at us. we're not cash flow positive yet. we don't have tangible assets. we don't have collateral, even when i give my house, it's not enough. what is going on in the market for credit for these high growth companies? at what stage are they coming to you? what kinds of products are out there? and also, how can we clone you -- i know that's bad for

competition -- or good for competition, maybe bad for you. but how can we have many more new points of access for credit for these high growth businesses? >> great -- thank you, karen. maybe a little bit of a background in silicon valley bank. as karen said we bank about 4,000 venture back companies. a little more context. we have about 13,000 total clients and in the u.s. we bank about 50% of any company in the u.s. that has received a round of venture capital financing and we bank more than 50% of all the venture capital firms in the u.s. and to karen's point we do have offices all over the u.s., 26 offices. anywhere where you would think there would be a high tech center and invocation center in the u.s. so to answer your question specifically, i would say first you have to break down the market into what i would call three segments. and i thought you did at the beginning this morning -- did a good job of breaking it down into two segments. i would add a third.

so if you take main street america -- the startups, the businesses, the dry cleaners and all the traditional businesses, that's one segment. another segment is the innovation sector. but i think you should break the sector one -- in one more way. you should stratify that in two parts. one is growth and then extremely high growth companies. just real quick stat on venture-backed companies, venture capitalists have invested in companies maybe 200 to 250 billion over the history. ..

>> since we are have such a high market share, we work to provide credit to the companies. we will routinely see two, three, four, five competitor term sheets on the companies. pricing may have gotten higher. but for the most part, it was availability of credit to these companies. and this is really at all stages to your question, karen, about these companies are. even before they have in revenue, we are lending them money. traditional banks aren't that comfortable with it. they want to see cash flow as a repayment source. we are comfortable lending on the knowledge of the venture capitalist, and what industries, and the intangible assets that

we will lend on. so that market has been strong. when you go to the non-venture-backed innovation company, the market is fragmented. that market was impacted in the downturn. karen, what you said earlier, which i 100% agree with. if you think about the banks in the banking sector, they were focused on the real estate. guess when, real estate lending isn't happening anymore. where are they going? traditional businesses, high technology, going to innovation sector. the competitor landscape for credit in the industries is more intense than i've seen in the last 15 or 20 years. so i guess the summary that i would say -- >> by more intense, you mean better. >> better from a market perspective. >> from a borrower perspective; right. we are seeing that. and again this is in the top segment of the innovation sector. so -- but there are still some

fundamental issues that i believe that could help the market be even better. i'll give you kind of three recommendations around them. the first one relates to laws that have been put in place over the last 12 months. one is the dodd-frank specifically one regulation which is the volcker rule. the volcker rule is an issue for a couple of reasons. one there are certain good things about it. but the bad things are so broad that it impacts specifically bank's abilities to invest in venture capital firms. that is about 10 to 15% of all venture capital comes from banks in the u.s. in some form or fashion. banks are going to be getting out of that, because the law regulations or eliminates that as an asset class that banks can invest in. a huge issue. venture capital is important. if you don't get bank that is are able to invest, you are not going to get the venture capital

to take place. that's a significant issue and one that i think needs to get remediated or it will be more capital pulling out. second thing, we talked about this earlier. is the fda reform. and maybe not -- it's not part of the treasuries requirement or treasury oversight. but i'll tell you we have a huge client base in life science companies. guess what? there are going to be fewer life science companies in the u.s. because there is no consistency in the length of time and uncertainty with the fda regulation. there are fewer companies being formed. it is a huge issue. and if that capital doesn't flow into those companies, we can't lend money to them and not only do you lose the venture capital, but you also lose the debt that's going into it. a big issue in the venture capital industry. the third recommendation that i would have relates to clean tech. the u.s. has an opportunity to be the dominant player in clean tech. but there's a gap between

start-up capital and commercialization that is not being filled by anyone. the government has tried numerous occasions to fill that gap. it isn't being filled. my recommendation is the government takes the exem loan guarantee program, which is incredibly successful, and take that model and apply it to clean tech. if you do that, i believe, those companies will survive, they will grow, and the u.s. is going to have a better chance of dominating the clean tech space over time. all of those things relate to capital formation, but then the debt on top of that which will help to create jobs and help grow the economy. >> let me ask you a following question on that, the loan guarantees. you are talking about exem bank guarantees. loan guarantees turn out to be a powerful, leveraged way for the government to participate. certainly been true in the past

credit crunch where we were able to raise our guarantees to 90%. take away our fees and kick start that market back up. but explain a little bit more about an idea. and let me on clean tech. maybe i can push you to talk about the focus of the administration in general, and can be the focus of the early stage companies and the clean tech companies. how might you use a guarantee system to once again fill this capital gap? >> maybe to give a little bit of reference in what ex-im bank does in the guarantee program, they support exports out of the u.s. what it does it provides banks a guarantee that is over and above what traditional banks would be willing to lend to a company. they will lend on a lot of inventory, and more aggressively on accounts receivable for a long period of time. the loans can be anywhere from a

few million up to 10-15, $20 million. they are sizable in nature. we have an ex-im bank guarantor for the last 15 years, and our track record has been incredibly strong. and it has promoted thousands of jobs by lending additional capital that wouldn't be able for banks, and the venture banks don't want to provide it because it is a working capitol need. that same model can be applied in an interesting way to clean tech. and if it's done, i'm not familiar with the sba loans, plus there's no person guarantee requirement. from that stand point, it's similar to the sba, and similar in some ways to ex-im, but it needs to be tailored to the clean tech industry.

it can create a lot of growth. >> clean tech loan guarantees. all right, mike, the marketplace has stepped up in a variety of ways. and all of you who are involved in the financial institutions have found remarkably creative ways of providing access to capital. tell us a little bit about the shifts that you've been start of and the products that you have come into and designed that fit in this category. in the beginning, you know, there was bootstrap capital, and credit cards, and home equity loans, now tougher to do on your home equity loans. what else are you doing in the marketplace and how have you orchestrated this into your own company? >> sure. so i'll try to tie together some of the things that we talk about about earlier. because ares is a public

company. we went in three years, and it was not easy, it took us three days. we have since scaled the public company to $3.5 billion market, and provide $13 billion to credit to small and medium-sized businesses in this country. so we have a good anecdotal story here about how public models and private model which i'll touch on can aggregate capital away to provide capital to growing companies. in order to frame, why is debt important to a growing company, can particularly in an entrepreneurial setting? first and foremost, it reduces to the equity holding and funds which is critical when somebody is growing a business. as we talk about incentives and compensation to the extent that they can access debt funding

away, it allows them to maintain a larger ownership in their future which is positive driver of innovation and growth. in order to really understand the debt market and echo something that they talked about earlier in the institutional space is to understand risk-return in the different channels for debt as well as the structure of the various markets. and i too would agree with greg. i think you have to segment the market really into three markets. one is the main street true start up. two would be the growth business that probably has good collateral and a little bit more stability given it's lower growth profile, and the high growth business. each of those businesses is going to get funded differently. i think, unfortunately, when you are talking about the true start up, jessica and bill will

elaborate, there aren't many traditional programs away from the home equity line, like a credit card, et cetera, et cetera, there are specific issues in those markets as well that i think con train credit. as an example, when borrowing on a personal credit card or small business credit card, the amount of the capital is going to be driven by a fico score. one the at tributes -- attributes or inputs is what percentage of your capital that you use. you get into the doom loop where it one is not able to access significant amount of capitals and funds up significant amounts, it has the reverse affect of making that person look less credit worthy as opposed to more credit worthy. which is quite remarkable. when you move into the growth and high growth arena, referring to what karen discussed, the

question of bankability has a lot to do with collateral on the one hand and predictability and stability of cash flow on the other. and i think where the market breaks down a little bit is in the notion of collateral. greg mentioned it's a well established market for companies that have collateral. a lot of high growth companies have receivables to very large multinational companies that are good quality collateral that you can lend against. bridging the gap from receivables, all the way through to a late stage of growth i think is really the challenge. as i think about the funding alternatives, i really look at the world as bank-funded alternatives, and nonbank-funded alternatives. within the banking sector, i think there's a fundamental issue of the concept of bankability. and when you talk about the unintended consequences from

basel i all the way through to iii, the credit particularly where there's no collateral is impugntive. when you look at the attributes and pricing models in banking, greg has figured out a formula given the scale. it's in many cases uneconomic to finance the start up borrower who has low capital. one the big predict tours is your loss given the default. if there's historic evidence to the contrary, if there's a presection, and i think there's issues in the banking that make it difficult for banks to really build this business, and build this business in earnest, and

secondly, as greg mentioned, in order to build the business, you want the business of fund investing and mezzanine investing. the risk equation has changed with capital requirements. >> you are saying something interesting ab the banking piece of this business. which is an important piece. is the affiliation and long-term relationship with the companies not only because they are going to grow and going to be important banking clients, you know, as they get bigger and bigger, but also because one can invest in them through the other funds? >> absolutely. so the second piece -- >> absolutely. the second piece to the banking equation is what i would call economic models. most banks are public initiatives have economic capital allegation models that they overlay on top of the framework, and they tend to think about the things of the lifetime value, other services that you can sell into that

client to enhance the return on that relationship. so again to the extent that the bank doesn't feel they can expand the touch points in the length of that relationship, it really does constrain capital flowing into the arena. a lot of that is like small brokerage firms who can't extend the life and long-term value of that client relationship because of the market constrains. where we are seeing banks be active, and in situations where there's collateral, and being active in venture leasing where you are affectively creating leasing a alternative to the loan. also as greg mentioned, we do see an appetite to back larger firms, ultimately, in the earlier stages, it's a loan to the capability of that venture manager to raise follow on capital. so i think that you'll see

different outcomes when you look at the top tier firms and their ability to access debt versus the nonsponsored startups. when you look at nonbanks, i think we're a good example. there are various funding mechanisms that exist to get capital into the market, both private and public. as greg mentions, there's probably no less than a half a dozen to dozen that are private institutionally backed bringing capital, and half a dozen public companies using the business structure to get capital into this market as well. the challenge, and this really goes back to what chris was talking about in terms of risk-adjusted return. the structure of the institutional fund raising community has been fixed income, alternatives, or public equity. >> you are saying you don't fit?

>> there's no role in the traditional allocation models for illiquid or some kind of equity component. there are a handful of people that have tapped the channel, it's not very deep. those that have not accessed permanent capital, or bank capital are at the whim of roll -- of allocation models, and i think that constraining growth into the market. >> i think that's a good point. i'm going to ask you to hold there. because it's actually a perfect segue into jessica. when you talk about innovative approaches, creating another flow of capital, i think, jessica, you are really pushed that one way out there in the innovation spectrum. do you want to tell us about what you have done? >> sure, thank you. as a philosophy and poetry

major, somebody who has focused on the loans around $500, and somebody with whom -- i guess for whom my introduction for entrepreneurial was with seamstresses and farmers in developing regions of the world, i am eager to bring a different perspective to the table here today. so -- where did i want to begin here? there are lots of different? like with keva, i can tell you how it works. it's a platform, started five and a half years ago, myself and co-founder matthew flannery, they can come and view entrepreneurs all around the world, including in the u.s. that need a small loan. usually the loans are only a few thousand dollars at most in value. people can lend for no interest $25 at a time. one the more interesting aspects

of keva, it's interesting in the motivations and psychology. they are not thinking where's my none? -- where's my money? they are thinking, whoa, i got my donation back. it's interesting to see how it unlocked a new friendly, forgiving form of debt. >> so it's bringing the retail element into the lending market? >> yes, yes. you know, we can have the debate on -- >> you too can be a lender. >> right. $25 and internet connection, you too can be a microfinancer. that's what kiva does. there's other forms, peer to peer lending, there are specific models of lending like on deck and cabbage which focused on ebay users or sellers. >> you've seen some of these -- and i'm familiar with on deck. because we looked at a lot of

these. they are also using different credit models. >> right. >> they are using credit models that give you much more realtime knowledge about your borrower. so the minute that i think one of them is even connected to the bank statements and you minute that you miss an interest payment on something else, you know, there's the signal or the minute that your cash flow goes negative at the bank, there's a signal to this particular lender. >> absolutely. i think it's a lot of exciting and interesting questions. there are a lot of what ifs. we can use technology to map these things so much more closely. what if more lending and investing was based on the different set of criteria. with profounder, i'm focused much more on investing. there's no reason we can't and probably will do this in comes months, provide debt and equity options as well. right now the model allow

entrepreneurs to raise funding from their communities under regulation rule 504 based on a revenue share agreement. it's a little different model. but i think it works for the small businesses, high growths and others that have come to us. basically, there are a lot of questions around, you know, how communities can catalyze growth, how involved and engaged communities can catalyze growth, you know, what are the differences in a company that's funded by 100 various stakeholders, whether it's customers, suppliers, employees, versus a company that's funded all else being equal by one person or one institution. there's great things to learn there. profounder -- >> yeah. >> i'm going to told you on that one for a second. we're going to come back around. once again that is perfect segue to what bill bynum has done. the notion that you are going to be in your community and all of the stakeholders in your community are going to become

invested in the entrepreneurs, i think this is something that you have exhibited quite powerfully. maybe you can tell us something about what you are seeing in underserved communities and communities in transition which is where, by the way, i think from policymaking perspectives, you can really justify the role of government. markets are great. but they don't provide universal access and opportunity. we don't. there are gaps. and the question is how can we at a very good bang for the taxpayer buck get these communities to be growing and prosperous and create some jobs? >> thank you. i appreciate -- i certainly appreciate that perspective. i'd like to start by renewing my open invitation to you and secretary geithner to come and work in the department that i work in and see that a full and

honest discussion of growth companies really has to acknowledge the differences that exist in and throughout the country. i'd argue that companies in the northeast and west coast has called it a limited perspective in terms of expectations of growth. and most parts of the country it's more realistic to think of growth in linear terms rather than exponential terms, seeing a company goes from five to eight as opposed to five to 100. the sales overnight is not very likely, but a few people is a very big deal for a company in greenwood, mississippi. and for the families getting those jobs. it's children rural -- it's different in rural places, than

you'll see in silicon valley obvious boston or research triangle park. you are not going to see the kind of exponential growth in the countries that we see in the markets. the availability of capital from friends and family is really less abundant in my region. consequently, businesses start at smaller levels in terms of size and the growth is slower. this is again particularly true in rural areas but also in the smaller cities and in the area that i work. i work in the -- i started in the delta region of arkansas, mississippi, and louisiana. we have grown over the years to expand into the greater memphis, into new new orleans, and statee throughout my region. in the past few years, we have been active in oil spills,

recovery, and businesses. you don't see software and media companies. you see biofuels, health care, you see elderly care growth, you see tourism and recreation, we finance both manufacturers that have grown and done well, rebuilding housing -- >> i'm going to ask you. i'm going to just interpret you a minute and ask you, you have done this quite successfully in the region. you are providing a lot of capital. when you see the medium-growth companies, what is it that they are looking for and why -- how have you gotten access to that capital? what are the programs that are really working that we ought to think about expanding or accelerating? >> well, i have to take my hat off to this administration for -- >> i was hoping that you'd say that. >> but it's true. i think i started meeting with

rosy during the transition. we started having conversations about how to involve cdfi in the institutions more prominently in the country. and this administration has done that. i have to put it in a plug, because i think it would be catastrophic, it would be a travesty if the cdfi funds budget goes through at a time when the institutions have been financing companies, helping them to stabilize during the recession, and many of the companies that we finance actually grew during the recession as when many firms were losing jobs. cdfi has played a critical role in making sure the companies have capital. that capital as bank credit tighten both to borrowers and cdfi. the capital of cdfi came from often the public sector. not just in grants, but in

investment in underserved markets through cdfi, the new markets tax credit program, i was really glad to hear the secretary talk about modifying that to be more attractive for small business financing. >> right, i think his words were stay tuned. >> and we will. we will also stay tuned for the small business lending fund which is gearing up to make capital available for cdfi loan funds. and the community development capital initiative where the cdfi fund and treasury made t.a.r.p. t.a.r.p. is such a bad word. if the large banks could access billions in capital, and certainly institutions that were targeted in the most vulnerable deserved resources to help those communities and those businesses succeed. and the cdci program carved out -- i think it seen cdfi into the

game. now mississippi has the 5th most cdfi in the country after texas, illinois, california, and new york. mississippi is at the front of the line in something that's positive. that's bringing $3 billion in capital that's accountable to investing in the underserved markets. that's very appropriate and powerful role that government has played. >> one the things that i think is interested about the underserving markets and i see marie johns here. my deputy at the small business administration who is running a whole task force and council on underserved markets and what we have seen now putting forward our community advantage program is that this does spur maybe not at the highest tier of the highest growth, but some of the serious job creators in the these communities and we need to